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Can my children loan my btl business money?


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We spoke to a tax advisor today as we are in the process of setting up a ltd company with our children as part shareholders.  We can't find anything online about the advice we were given so I'm testing it out here if that's ok.

Our children have received ~£150k from grandparents that is currently not doing anything in a bank account and we can show it having come from grandparents and not parents.  Ideally the children would loan this money to the company to invest.  My husband and I will also invest a director's loan and the company will invest in property and hopefully grow well (we already have 2 properties and are looking to grow).  The children would be paid a commercial rate of interest on their loan of £150k (HMRC rate of 2.25%).  Their money is currently in an account rather than a trust so there aren't trustees but given the rate of interest they receive in the bank account is less than 2.25% and they will also be shareholders benefiting from the growth of the investment, it would appear to be a good investment for them.  We have been advised that they can be paid the interest on the loan without being taxed as parents as the money came from grandparents and not us.  Has anyone got any experience of this?  Does the tax advice we have been given make sense? Is it legal for children to loan money?

Thanks in advance for any advice

Toni

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Hi Toni, I can’t give direct experience.  I would say test out the plan with at least one other tax advisor given it is your children’s inheritance, particularly if your children are under 18. That could help to show up any issues perhaps even if it costs a few hundred pounds. Also do you need them to loan you the full £150k?  Why not have the children put 30% of your children’s money in a high growth stock market fund via ISA wrappers with a view of compounded growth over the long term.  That will give them another tax free cash source in future years which, if it performs, they will thank you for when they draw it down.

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Thanks for the advice - we're in a fortunate position that the children already have S&S investments elsewhere so we just want to diversify their investments.  As you suggest we might just check it out with another advisor. 

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