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Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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My parents are giving us 300,000 to buy a house in the UK.

Customer Question

My parents are giving us £300,000 to buy a house in the UK. How do they go about setting up a loan to avoid paying gift tax, and what is the lowest rate of interest they can charge us? Finally, can they transfer the money into our account straight away and set up the loan retrospectively? This is what they are planning to do but am concerned about them being liable for gift tax if they don't write up a loan contract first. Thanks.
Submitted: 4 years ago.
Category: Tax
Expert:  Tax Expert replied 4 years ago.
HI JACUSTOMER

Thanks for your question

If you plan to pay all the loan back - then
1) it will not be treated as a gift
2) There will be no interest to declare to the tax office on which tax must be paid.

They can set up a written contract - that details what they will loan you - how much will be paid back - and over what period of time - (and whatever interest they wish to charge you) and signed by them and you. And detail any default arrangements should you not make payments on time - or fail to make payments.

As far as the legal aspect is concerned, you should each have an independent witness to sign but I am a UK tax expert - and not a UK law expert - so you may want to seek further advise on this.



Then they can deposit the money straight into your account - so that should the need arise
1) you have evidence that this was a loan from parents
2) they have evidence that this money was loaned and not gifted
3) they have evidence of the repayments received from you to repay the loan
4) Should they not survive before the full loan is repaid - then this can be collected when the estate is reviewed - to tie up all financial aspects

The only tax implication that will arise, is should you pay the loan back with interest - and then your parents should declare this untaxed interest to the tax office after each 5 April

Thanks

Sam
Customer: replied 4 years ago.
Thank you. Sorry are you a US or UK tax expert? It was unclear in the response. We are looking for someone in the US to answer this question, even though we live in the UK. Just to understand how the IRS treat this sort of loan.

We would essentially be hoping to slowly pay back the loan plus minimum IRS interest using the annual gift money my parents can give us. So essentially offsetting what we owe them over the years with the gift allowance (13,000 each to myself and my fiance from each of my parents, so $52,000 total offset each year).

Thanks.
Expert:  Tax Expert replied 4 years ago.
Hi JACUSTOMER


Thanks for your response

I am a UK tax expert - so I shall arrange to have your question transferred to the USA tax forum - but do take note of the aspects that apply to you as the UK recipients

Thanks

Sam
Customer: replied 4 years ago.
Thank you.
Expert:  Merlo replied 4 years ago.

Hello JA Customer,

 

Your question has been transferred to the US tax forum to be addressed.

 

First, there is a misconception that gifts over $13,000 annually are taxable. That is not the case. Under current law, each taxpayer may give up to $1 million in gifts during their lifetime before they actually owe any gift tax. There is an additional $13,000 annual exclusion which does not even apply or reduce the $1 million lifetime limit. Gifts which exceed the $13,000 annual exclusion must be reported by the giver of the gift by filing Form 709 with the IRS which is a gift tax return. However, no gift tax is actually due until that taxpayer has used up his allowed $1 million lifetime exemption.

 

So if your parents were to give you a gift of £300,000 (which is approximately $458,000 US dollars), they are still below their allowed tax free lifetime gifts of $1 million each. They would simply need to file Form 709 and report they gave a gift of $458,000 (which would be $229,000 from each of them). This would then reduce the amount they each could still give in their lifetimes down from $1 million to $771,000 before any gift tax would ever be due.

 

That being the case, you do not really need to set this up as a loan. Your parents simply need to file form 709 and report the amount of the gift they have given you, and that will be the extent of their obligations and no tax will be due.

 

If this was helpful please press the Accept button. Positive feedback is also appreciated.

 

Thank you JA Customer

 

 

Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
Merlo and 7 other Tax Specialists are ready to help you
Customer: replied 4 years ago.
Thank you that is great to know.
Expert:  Merlo replied 4 years ago.

Thanks for using JA

 

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