Guidance on documentation required for interest free loan

[julie.haines89]

My husband and I are planning on taking an interest free loan from my parents to help pay off our mortgage. There is about 200K outstanding on the mortgage & we will be taking a loan of 200K, broken down as follows:
* My father provides a loan of 50K to me.
* My mother provides a loan of 50K to me.
* My father provides a loan of 50K to my husband.
* My mother provides a loan of 50K to husband.

The reason for splitting the loan as above is to minimize the potential for CAT tax liability on the notional interest; i.e., deposit rates would need to rise to 6% for us to breach the 3K small gift exemption per counterparty pair (i.e. 3k/50k is 6%).

I would like to formalize the process as best as possible (in particular I would like to ensure that I have appropriate documentation for this loan, should I ever apply for a mortgage in future again). However, I have found it difficult to find guidance on how best to do this.

Is it simply a matter of writing up 4 separate contracts (signed and dated) with details on the principals, interest rates (0%), and terms (10 years) of the loans?

Are there any additional guidance I should follow, e.g. keeping a record of monthly payments made?


Thank you very much for your help.

Julie

 

[RedOnion]

The reason for splitting the loan

I don't believe you need to do this. 1 loan from both of your parents to both of you.
Keep it simple, loan repayable within 10 years, note the current 10 years state savings rate at the date of loan on the letter (this is the 'gift').
Repay by bank transfers, and record a narrative that you can easily pull together proof if its ever needed.

Separately, make sure it's very clear to all parties whats to happen in the event of any party dying before the loan is repaid.

 

[julie.haines89]

Thanks RedOnion, I really appreciate your reply.

note the current 10 years state savings rate at the date of loan on the letter (this is the 'gift').

Is this something which we we would need to capture on an annual basis? Or is the notional interest only derived at the time at which the loan is initiated?

 

[RedOnion]

Or is the notional interest only derived at the time at which the loan is initiated?

Just at the start, or at least thats what I've done previously. Your parents could put money on deposit today, fixed for the next 10 years. They're forfeiting that interest to give the money to you on loan.

Since you'll be making repayments, the balance is reducing, so the 'interest' gift is also reducing. Reality is Revenue don't care about such arrangements.