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How to manage investment from parents


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Hi all

I'd be so grateful if anyone can provide some advice to help me. I'm not sure if we qualify as 'newbies' but my brain is starting to hurt so I feel like one!

A bit of background: My wife and I have a Ltd company. Currently we have one property bought through that limited company that is rented out and is making some good returns. We both have day jobs, I am a higher rate tax payer and she is a basic rate tax payer.

My parents have offered to invest 100k in to help us purchase a couple more houses (we're in Manchester so looking at a couple between 140 and 160k each purchased with 75% LtV mortgages). We want to be able to give my parents a return on the investment (around 8%; we currently make around 14% on the house we already have so this seems reasonable). There is no guarantee they will ever want the money back but provisionally we are thinking about it as a ten year investment. 

My question is how do we manage this?

My first though was that they could make a loan to the business. I spoke to my accountant and the plan would be that we would pay them interest at 8% a year (we would hold back 20% and pay that to HMRC quarterly alongside completing a CT61 form and they would declare that 20% tax already suffered), provided we could prove this rate was competitive HMRC should accept it. We would draw up a contract and the loan would be for ten years- this would enable us to get control of a couple more properties, make a small profit and then, when we eventually sell some to pay them back the original investment, we would obviously profit (hopefully) from the capital growth. This all seemed to work but the problem is, according to one mortgage broker I spoke to, most lenders wont be happy with this. Is this correct? Is there anything I could do with this arrangement to make it acceptable?

My second thought was they could just give it to me as a gift and I could then invest it. This issue being there though that any returns I give them would need to come out as dividends to me, which I would then give to them as a gift. This would involve paying dividend tax on anything I give them which is expensive.

A third idea could be to make them shareholders in the company and then they could invest the money themselves and then take out profits as dividends. If it was just my Mum that did this she would pay no dividend tax as is retired but below state pension age and so is below the personal income allowance. I'm not sure if this would work as I don't know if any lenders would agree to provide a mortgage to our company if we had additional shareholders and I also don't know if my Mum would be able to take out dividends without us also having to (which we don't want to).

Basically this has turned into a massive headache- 100k available to invest in a market we've got to know and we know can be very profitable but we can't work out how to do it.

If you've stuck with me and read to this point thank you so much, if you can give any advice I'd be even more grateful.

Thanks

Tom 

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The simplest route is to have the loan relationship between you and the company. If you pay your parents interest and the company pays you interest, then your parents have taxable interest income and you have taxable interest income offset by an allowable interest expense so no tax cost for you. 8% on an unsecured loan seems commercial so HMRC are unlikely to challenge.

If your parents become shareholders then it adds complexities and reduces your pool of lenders. Some lenders don’t like 3rd party loans or additional shareholders especially if they are ageing.

Shares with specific rights and dividends attaching could be issued to your parents or held by you on behalf of your parents to achieve similar results although again this just muddies the waters with lenders.

If your parents return on investment is ultimately interest, then it’s deductible for corporation tax purposes although they could have an income tax liability.

it’s advisable to be clear on gift versus loan so your parents inheritance tax position is certain. Good luck!

Jerome

Jerome@TaxAntics.co.uk

www.TaxAntics.co.uk
 

 

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