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Sam, Accountant
Category: UK Tax
Satisfied Customers: 13862
Experience:  26 HMRC expertise, PAYE, Self Assessment ,Residency, Capital Gains, CIS ask for Sam Tax
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I have a dear friend and a very kind business

Customer Question

Hello,I have a dear friend and a very kind business associate/partner proposing the following situation and I just wanted a heads-up on where things may stand on this.This person wants to loan me £250,000 personally towards a deposit for a house. It will be interest-free and we'll set a timeline of 10 years for this to be paid back. He's already intimated that he may as well give me this money, rather than loan it to me, but I said that I'd prefer to do it this way for now. My thinking is I at least want to give him some time to consider the loan over the years and if he ultimately decides he wants to tear up the loan and gift me the money, fine. I'll be more comfortable with it if he decides over the longer term. Gifting money, no matter how wealthy you are, is no small matter and I want to treat his generosity with respect.This person is a non-dom (he has lived in the UK for over 10 years but is currently based overseas and will remain that way). I am a UK resident and British national. I was born here. We work together. He owns a couple of companies I consult for (i.e. his companies are a couple of my clients). A company he's an owner/Director of is responsible for paying me on a self-employed basis (well, I have a limited company but it's largely the same thing I understand in this situation). We're also directors together on another entity. But mainly, we're friends and our families are close. I'm sharing this so I'm transparent to our relationship.So, I guess I would like to know is what would be the outcome of this situation, if let's say, that in 10 years (or less), he decides to tear up the loan agreement and tells me not to worry about the loan (therefore it turns into a gift). Questions like: Who do I declare this to? Is there forms where I have to declare personal loan arrangements or gifts like this? Do I fall into muddy water on tax liability? If so, would it be payable and due at the time of ripping up the loan agreement (i.e. when it turned into a cash gift) or the date it was agreed? I guess HMRC would want to know about this, but what business is it of theirs on the basis that this is a personal loan and/or ultimate gift?I guess I worry a little about this proposed generosity, as I understand it that HMRC work on the basis that if they think that the loan/gift is a quasi-payment, that they have the last say on the matter and may make an inaccurate ruling in order to help prop up their own balance sheets, no matter what the truth and reality is. I often get advice that if there is a grey area, the default lies with HMRC and they get the final say. I imagine "gifting" and situations like mine is likely not common, I just wonder if it will look too odd for HMRC to rationalise/believe and therefore create their own version of events of why I'm receiving the money. In other words, I'm nervous about accepting his generosity for the potential ramifications I may face if entities like HMRC have a problem with it.Some help and clarity on this matter would be highly appreciated.Thank you.
Submitted: 1 year ago.
Category: UK Tax
Expert:  Sam replied 1 year ago.
Hi Thanks for your question - I am Sam and I am one of the UK tax experts here on Just Answer. This would be treated as salary/profits as you are connected through employment/limited companies and I am afraid there is no getting away from this UNLESS a full loan agreement is drawn up with the terms and that you do in fact repay the money fully.If the money is lent to you from his business (rather from his own personal bank account) then interest has to be charged for this then not be treated as a beneficial loan. So to keep this fully away from HMRC 1) the loan must come from this person personally 2) A loan agreement drawn up (it matters not whether interest is charged or not) 3) Regular repayment terms are set in place and do actually take place (and evidence such as bank statements)4) if this changes to a gift - then it will be treated a loable to corporation tax (of paid through the limited companies) or a salary if paid to you directly. Let me know if I can assist further ThanksSam
Customer: replied 1 year ago.
Thanks for the quick response, Sam.This is proposed to be personal to personal, certainly.So I'm clear, where is the ruling from HMRC which says that if you're connected (client/supplier and in another instance, we are company directors) that a gift can't be a gift? He's not my boss. He doesn't employ me. But more importantly, he is my friend. I'm interested to see where this is clearly articulated so I'm very aware of this ruling. It seems remarkable that they have a blanket statement which says if you're connected in the ways we are, that no gift ever can be treated as a gift.And why do regular payments have to be set in place? Why couldn't he be generous and insist that the loan only be repaid in 10 years? Surely 2 individuals can agree whatever payment terms they like. Why does HMRC have a say on the repayment terms?And your final point when you say... "if this is changed to a gift"; by which indication would this be turned into a gift? Playing devil's advocate, let's say in 10 years time, he doesn't want to force the loan repayment and instead gives me another 10 years to pay it. When would it be deemed that this is a gift and not a loan? I'm just trying to be clear as to when the point in time comes when it's changed into a gift and furthermore, when the tax liability for that action may ensue.Thanks for your prompt engagement.
Expert:  Sam replied 1 year ago.
Hi Thanks for your response You asked us for expert advsie - I have given it - your argument should be with HMRC not me as they make the ultimate ruling, You already know what HMRC will think - as you have all your arguments prepared and thought out, but they will argue you ARE connected through business and this fact does not cease to exist. I have advised how to avoid having this treated as income = there are no if buts why or wherefores - to have HMRC accept what you want them to accept then you either follow the advsie or dont - and risk HMRC having full and valid arguments to counteract yours But if in 10 years time this then suddenly is argued to be a gift - then you will be liable to tax on it as you are connected through business and at this point the consideration of liability (and the fact you havent made any loan repayments renders it a taxable consideration. This link looks at gifts in the course of business which you argue it will not be - by HMRC would sue this as to how a connection arose is loan to employees (if they felt a case could you made that you were in fact and employee rather then engaged limited company) Whilst these all work on the basis you are employed rather than just a connected business - the consequence of a beneficial loan = or a gift made (which is in the guise of a loan) arises. As long as the advsie given if followed -Loan agreement drawn up - regular (as in monthly or quarterly) as you are trying to convince HMRC that it is a loan privately made - and a gap of 10 years before deemed repayable is not a loan when you are connected parties. And failure to repay also renders a new look at the arrangement, I would expect you would want to avoid that issue resurfacing after 10 years. Thanks Sam
Customer: replied 1 year ago.
Hi Sam,I hear what you're saying and I won't argue with your knowledge on tax law. I'm simply presenting some facts on my side you may or may not know about. For example, you've mentioned "This would be treated as salary/profits" and I feel there's a difference and somewhat distinction here, that's all. So I'm explaining and providing clarity and hoping for it in return.1. As for "salary", in my limited company, I have a number of clients so I don't see how HMRC could say this is an "employee benefit" and suggest this person is my boss/employer. My previous tax advice was that if I had multiple clients, through a limited company, then this satisfies HMRC's requirements that a limited company isn't set up as a quasi-employment scenario. So I would assume this is the same situation in how this loan/gift would be treated. How can it be seen as a non-employee working relationship in one way (i.e. the limited company and how we transact on that) and then definitely be seen as an employee-working relationship when it comes to the loan/gift?2. As for "profits", there are no profits in the company we're co-directors of. It's a startup and the company currently has zero money in it. It may be closed soon with this situation unchanged. So I'm not sure how this loan would be seen as profits.I guess, in very simple ways, I am not sure what evidence HMRC would have to see this as salary or profit. Admittedly, they might find it generous and peculiar, but going from that position to "this must be income" is a bit wild. I feel your ferocity on the points you make, it's just the links you've provided to me don't fit into my situation and some of your terminology to describe my situation doesn't feel like it quite fits.And finally, on this key point, you say "they will argue you ARE connected through business and this fact does not cease to exist". What specifically does "connected through business" mean in this context? What importance does that vague term hold and more importantly, is this saying that no people who are connected in business can loan or gift in this way? If I'm not an employee, nor if I am a client of this person, then I'd love some more colour around what "connected through business" actually means and how this affects this current situation as those 2 links you provided don't seem to apply.Just a small point on your proposal of repayment terms; as you know this person would be loaning this money for a house. This person doesn't want to see me drowning in repayments, otherwise I'd have obviously gone to a bank. So the sense of enforcing monthly/quarterly repayments kind of defeats the purpose of why this loan is being given. So some original thoughts I had were that there might be an agreement in place that when I sell the home, their equity/deposit support would be returned. This person would be happy to see their money returned from the rise in property value but not to see it putting me short every month/quarter with repayments. As I say, otherwise, I'd have gone to a bank. So would this not be a reasonable repayment scenario? As I say, I'm buying a house so the deposit is for the house. A reasonable repayment in my view would be to see it come from the value of the property rise, would you not agree?Thanks, Sam.
Expert:  Sam replied 1 year ago.
Hi Thanks for your response I did advsie that the employee position may or may not be an issue - but you asked for me to provide evidence of where HMRC may argue a connection - Without exploring the way in which you are engaged with this particular business which is not what you were asking in your question, i would be remiss of me not to raise this as an issue to support furtehr the argument. You clearly are commected with this business and cl;early had concerns how HMRC might interpret this arrangement and I have provided you with clear advise on how to avoid HMRC even raising an interest in this arrangement, so I am a little confused on what more you might need You advised it was a loan as you wanted to repay it - so I have advised 1) make sure there is a loan agreement in place2) that you make regular payments to prove this is a loan And if it isnt a loan and never was going to be then HMRC will say you are connected and treat this as profits as you have a connection other than friendship - its that simple and not only do you work but you now also advsie you are co -directors in a start up company.... You seem to think HMRC going from one position to it must be profit as being a bit wild - then why did you ask after HMRC and the position you felt they would take - Its irrelevent why this loan is forthcoming (which you keep then saving might not be a loan and might become a gift) If you have in place that their loan would be repaid if and when you sell the home - then as long as you do stick to that - and have a loan agreement drawn up to that effect then HMRC would accept that. But you seem to be picking apart the advise I give - rather then take it on baoard. If you would like another expert to assist you - I am more than happy to opt out ThanksSam