Best advice if you want to make sure this is legally correct is to go and see a solicitor preferably one who specialises in inheritance and capital taxes. You'll need to register a charge against the property as that will be effectively what you are setting up.

The perils of getting something slightly wrong and you ending up with a tax liability are far worse than the money you'd spend getting the agreement drawn up professionally now.

Mike G:

I have read that any debt owed to me would reduce inheritance tax liability of the estate.

Only in as much as repayment of a debt is not an inheritance so there's no inheritance tax. If you made a gift of the money and then inherited it back, there could be inheritance tax.

Thanks for your response maxsteam.

In fact I will provide the monthly payments from my salary. As I mentioned in my note (I know it was long ;o) ), this ~20% of the money I set aside each month for savings.

I agree that linking to a (say 3-month UK) LIBOR rate might be simpler.

I have read that any debt owed to me would reduce inheritance tax liability of the estate.

So still interested in how to mitigate my tax liability and making sure the contract is recognised as an unambiguous and valid agreement by HMR&C

Mike

If I understand correctly, you are planning on borrowing money and lending it to your parents. I agree that this would be better than an equity release scheme.

For the interest charged to your parents, I would be inclined to set it at something like "3% over the LIBOR rate at the last close of business before 1 January, divided into 12 equal monthly payments, payable on the 1st of each month". I think this a little more definite than the best savings rate available on MoneySupermarket becuse you may find that, on the day that you want, you can't connect to the internet and, every now and then, one bank or another offers a high rate which is conditional on you paying lots of charges and this may not show up fully in the MoneySupermarket tables. Dividing the interest into 12 payments isn't using the rate as an apr but it wont be far off and it makes the calculation easier.

The repayment can be "at the earlier of the property being sold, or 90 days after either the lender or the borrower giving written notice that they wish for the loan to be repaid."

The contract should be something that everyone involved is comfortable with. Templates can help you to make sure that you've covered everything but it is more important that the agreement does what you all want.

I am not sure about the lump sum option. You could either specify an amount or just leave it alone and draw up another agreement if needed.

I expect that income tax would be payable on the interest received and not on any capital repayment of the loan. There may be inheritance tax if you were going to inherit a share of the property but this would not be changed by the loan.

As for family disputes, the best way to avoid them is to be open and honest at all stages and not to drop any "bomb shells". You could, if you wanted, explain that your parents will be borrowing the money but you don't mind if they borrow it all from yourself, half from your sister or all from your sister - it's up to her.

If you will be financing the loan to your parents with a commercial loan, you obviously cannot cease payments at any time unless you repay early. Some commercial loan agreements charge a penalty if you do this.

I guess in this current economic environment, my parents can't have been the first people to look at equity release as the value of their savings and investments drops dramatically. Downsizing with the current property market as it is does not seem a sensible option.

When they told me about this and the best rate and flexibility they could get from a commercial organisation it occured to me that I could lend them the money and it would be financially advantageous to both of us. According to the salesman of the scheme they were considering, it is quite common for this to happen.

These are the issues that I need to resolve to get the arrangement in place. Would anyone like to comment on any of the points or anything I have missed? Both my parents and I are keen that the arrangement is on a fair and business-like footing to avoid any future problems.

o Interest rate - to be fixed annually on a set date based on the best available savings rate on MoneySupermarket.com. Need to find suitable wording to express how the interest rate is applied.

o Repayment clause - on the sale of their family home (either when they move or on death)

o Contract - I am still looking for a suitable template to buy. Most relate to a lump sum loan. Not such a scheme where I lend a monthly sum and a lumpsum with no repayment until the house is sold.

o Type of loan - fixed monthly allowance (plus 2% annual increase) plus option to borrow one lumpsum during the period. All interest and capital to be accrued

o Tax implications - the contract will be between my wife (currently a non-tax payer - all of our savings are in her name) and my mother. When the loan is repaid it is likely that there would be a tax liability for her. To minimise this we are considering whether to look a repayment over 3 tax years to minimise likely impact. The interest earned over the 10 years is ~ Thoughts very welcome here!!

o Avoiding family disputes - My sister is aware of my parents intentions to set up a scheme (and its impact on her/our inheritance) but we will only tell her that it is me lending the money once all the arrangements are made. Explaining that this arrangement benefits her because a greater inheritance will be left than using a commercial organisation.

Other information (if necessary):

o They only have a small mortgage (less than 10% LTV). We expect the arrangement to last no longer than 10 years (my parents are 75 and expect to downsize by then) and the combination of the monthly loan plus a lumpsum in year two to repay the mortgage would represent ~20% of the current LTV of the property.

o I see the loan as part of a long term savings plan for my 2 daughters (3 & 5) for university, weddings and housing deposits. As well as for my older sons but I will probably need to set up additional arrangements for their needs as they are 11 & 9 and I may need access to the savings within the 10 years.

o The loan is affordable for me ( less than 15% of what I save each year) plus the lumpsum is ~20% of my expected cash savings (bonds etc) that I will have in 2 years time. However we have (verbally agreed - and to be written into the contract) that I can cease payments at anytime and they can then revert to looking at a commercial organisation or downsizing if my financial circumstances deteriorate.

Thanks very much in advance, Michael