Borrowing from friends for property purchase

[Flymask]

I recently borrowed money from two friends in order to invest in a property abroad. The loan from one friend amounted to approximately 25% of the purchase price, while the loan from the other amounted to the remaining 75% of the cost. It has been agreed that these loans will be repaid in one lump sum to each person, as opposed to there being installment payments.

I wish to ensure that, in the event of anything happening to me before the loans are repaid, my two friends are protected. More specifically, I would like to have it stated that the property should be sold and the loans repaid in full before my estate is distributed among any other beneficiaries of my will.

Can this type of clause be written into an ordinary will? I do not simply wish to bequeath the property to my friends as this would presumably leave them open to an Inheritance Tax charge. Nor (for various reasons) do we wish to have the property registered in joint names.

Is there some legal way of protecting their interests that will not subject them to any tax charges? Although I have no reason to worry that the main beneficiary of my will would do anything to see my friends out of pocket, I want to ensure that the property does not actually form part of my estate until the loans have been repaid in full. Can this be done?

As the property is situated in Italy, someone has suggested that I make a separate will in Italy which only covers my assets there. However, I can only presume that this arrangement would have similar Inheritance Tax implications for my friends.

Any help or advice would be greatly appreciated.

 

[mf1]

If there is documentation covering the loans, then your friends can recover as creditors in your estate. If there is no documentation, perhaps there should be. And it could be covered in the will also i.e. that if debt to friends is still outstanding that the property is to be sold and the debt repaid.

mf

 

[Flymask]

Thanks for the information mf. Naturally, there will be a certain amount of documentation regarding the loans, i.e. proof of transfers from their accounts to mine etc. As further proof, will it suffice if we just draw up and sign statements to the effect that these transfers constitute loans to me or should we engage the services of a solicitor? If they needed to recover the loans as creditors, does this involve legal hassle and costs to them or would it be a straightforward entitlement to them, particularly if it were specifically stated in my will that they were to be repaid through the sale of the property?

 

[oopsbuddy]

Why not get them to take out life insurance on your life? Either you or they can pay the premiums until the loans are repaid, then simply cancel the policy(ies). In this way, the proceeds of the property sale can remain as part of your estate. Would this suit your circumstances?

 

[Flymask]

Hadn't thought of that option oopsbuddy - thanks. However, are there not tax implications for non-related individuals being the beneficiaries of a life insurance policy in much the same way as Inheritance Tax?

 

[oopsbuddy]

Hadn't thought of that option oopsbuddy - thanks. However, are there not tax implications for non-related individuals being the beneficiaries of a life insurance policy in much the same way as Inheritance Tax?

I'm getting a little out of my depth here on tax issues, so I'll state openly that if you are interested in such an option, it should be well researched with a solicitor or accountant/tax adviser. However in the case of a partnership (which you sort of have!) and where there is an appropriate partnership agreement in place, it is possible to have the policy written in trust, so that the proceeds are paid without liability to tax. I apologise in advance if I have suggested an option which may not fly, but it should be worth looking into at least! After all, its the same type of arrangement in principle as you would have if you borrowed the money from a bank, ie, you will be obliged to take out a life policy on your life, and to continue to pay the premiums for the duration of the loan, for the benefit of the lender. I hope the suggestion is of interest, even if it doesn't end up being the right option for you.

 

[Brendan Burgess]

There is no need to make the simple, complex.

As MF1 has pointed out, when you die, you will owe these people money. The estate will have to repay the debts of the estate before distributing the money to the beneficiaries.

You should have a formal loan agreement in writing stating the conditions under which the loans are to be repaid. This should also state the interest rate to be paid.

If you are not paying interest on the loan, you could be subject to Gift Tax(Capital Acquisitions Tax). If the lenders get interest, they will have to pay income tax on it.

If you are giving them some share of the increase in value of the property on disposal, then I am not sure about the tax implications.

To protect the interests of the lenders further, you could execute a mortgage in their favour. You would need a solicitor to do this for you. This means that they "own" the property until the loan is repaid. Your executor would not be able to sell the property without first agreeing to repay the mortgage. (In general, we use the word "mortgage" to mean a loan, but I think that the legal meaning is more precise - it refers to the security for the loan.)

I see no advantage in life insurance unless you want the overseas property not to be sold.

Brendan

 

[Flymask]

Many thanks for the ideas/advice Brendan - much appreciated! Naturally I'm hoping that none of the precautions will have to come into play but, having been so generous to me, I don't want my friends to be exposed to any risk as a result of giving me the loans. I think I'll just get on to the family solicitor & execute the mortgage. Effectively, that is what I wanted in the first place - i.e. that they would 'own' the property - but wanted to do it so that they wouldn't own it through inheritance. Thanks again.

 

[oopsbuddy]

There is no need to make the simple, complex.

I see no advantage in life insurance unless you want the overseas property not to be sold.

Brendan

With all due respect, I was trying to suggest a way of keeping the issue simple, in that if the lenders simply wanted their money back, and if Flymask got ill or died, that is what would happen. Who knows what the property market will be like at an unknown time in the future, or how saleable it would be, or if there may be a shortfall in the realised amaount? There could be huge delays in selling the property, especially if it was tied up in probate, plus all the additional issues then raised by Brendan. I did also suggest that this may not suit Flymask's circumstances, and he simply has to make a call on that.