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Tony Tax
Tony Tax, Tax Consultant
Category: UK Tax
Satisfied Customers: 15899
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I made a long term fixed loan flexible term with a Declaration of Trust and Loa

Customer Question

Hi,
I made a long term fixed loan for a flexible term with a Declaration of Trust and Loan Agreement in place with a friend. A few weeks ago, I received a higher pay-out after around 10 years or so of the money being invested. My friend owned the house and is still living there (he repaid me from a cashed-out pension). I am now wondering whether any uplift is liable for tax and if so, what is the most tax-efficient way of dealing with any 'profit'? The property was entirely in his own name and I was not registered as a shareholder at the land registry.
Submitted: 2 years ago.
Category: UK Tax
Expert:  Tony Tax replied 2 years ago.
Hi.
Can you tell me what the terms of the Decalration of Trust and the loan agreement were and why you received a larger payout than expected please. Was all the interest rolled up and paid at the end of the loan term?
Customer: replied 2 years ago.
Hi Tony Tax,
Terms of the DOT were that I owned 23% share of the flat.
There was also a loan agreement drawn up between us in December 2014 which specified how much, how and when the loan would be repaid (which it was in early May). When drawing this up, we agreed on a current property value using local comparables and calculated my 23% share of that which we were both happy with as a settlement figure.My friend sadly passed away earlier this week from terminal illness so I am sad but also very grateful that he organised his affairs in time to see my loan repaid. He married a close friend last week, presumably to minimise the tax exposure on his estate.The original loan was £80k, the pay-out £140k so the balance we are talking about is £60k. The loan was made in 2003 and I was not earning for many of those years (up to 2012), during which time I had little or no other income. One thought is that I may be able to use my annual tax allowances - can I do this retrospectively? Or are there alternative ways of structuring this to minimise any tax exposure?I interior designed and project managed the refurbishment of the flat for no additional reward in 2007 - 9.
I also had a Directors Loan of £30k which (due to losses), was never repaid by my now-closed cosmetics business in 2009.
I have two children to whom I could gift to, at some point.
And / or I plan to re-invest the £140k in property, either as an individual or through a company.I trust this information points to a helpful conclusion.Many thanks, Yvonne
Expert:  Tony Tax replied 2 years ago.
Thanks.
I will need to take a look at this and will get back to you later.
Customer: replied 2 years ago.
Thanks Tony,
In case it makes any difference, the property we shared might best be considered as a furnished holiday let, since my friend was staying there and I was resident elsewhere.
Regards, Yvonne
Expert:  Tony Tax replied 2 years ago.
Hi again.
I'm afraid that trying to structure anything now is too late. The horse has bolted, so to speakm as you have had the payment and its origin has been documented.
It's not clear whether the agreement mentioned interest or a fixed sum payable in the future and that may cause a problem with HMRC as to the nature of the excess payment, ie is it interest or a capital gain. It's certainly one or the other.
It could be argued that the DOT shows you as a part owner who was bought out recently in which case, you have a capital gain of £60,000. It will be taxable in the tax year it was realised. Unless you spent money on the refurbishment yourself, I cannot see any hope of claiming just for your time at an hourly rate.
If the payment is interest it will be taxable in the tax year it was paid to you. It would have had to have been paid to you annually for it to be spread across the ten year term.
In either case, you cannot use unused personal allowances and capital gains exemptions from earlier tax years. In the case of a capital gain, you can claim the loss of your director's loan as a capital loss and use it agains the gain. Take a look at:
http://www.rossmartin.co.uk/private-client-a-estate-planning/1153-cgt-relief-loans-to-traders
for more information on the tax treatment of the loss of a loan.
My inclination would be to treat the payment as a capital payment as that will probably give rise to a lower tax liability but as there was a loan agreement, HMRC may argue otherwise.
A furnished holday let is by defintion not usually let for longer than 30 days at a time to one individual.
I hope this helps but let me know if you have any further questions.

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