Loan from Parents

[nevelizzie]

In 2004, my parents in law bought my husband and I a house for £130,000.

The agreement was that we would buy this house from them once we had sold ours. At the time, the market wasn't great and we decided to rent it out for a while.
The rent from the property was collected by my father in law, as 'interest'.
We have wanted to sell the house since, however he has encouraged us to keep renting it out...

So, in summary, he has had in the region of £80k in rent. He has not paid tax on this. We have continued to make the mortgage payments on the house, however they are considerably less than the rent he receives.


None of this has been looked over legally, and he is expecting us to pay him £130k back. He considers the rent he has had as interest - nothing has ever been agreed either formally or informally about the amount of interest we would pay, but the agreement in 2004 was for the rental to be a short term thing.

The property we live in has increased significantly in value, and is in the name of my father in law. The house we own and rent out hasn't increased much in value over the past 15 years.

The property we live in has been renovated by us, and paid for by us.

I need some help please. I know that this is going to be a tricky situation, and may lead to a family fall out, but I need to sort this out for my children.

Any advice on how I should proceed would be greatly appreciated.

[james_law]

Hello,

Firstly, is any of this agreement in writing?

[MIKE770]

blimey wish I was your father in law and getting the rents-

[Amethyst]

Is the house mortgaged by your father-in-law ? or was it a 'cash' purchase ?

It sounds like, in essence, you've been renting a property from your father-in-law for the past 15 years, and your rent has been the same as you have obtained in rent from your other property. Once you sell the property you own, you'd be buying the house off of your father-in-law at the previously agreed fixed price of £130k ( rather than it's current market value ).

And as James asked - was any of this in writing ? ( that you'd buy the house at unspecified point in the future for the £130k )

[nevelizzie]

Thanks for your replys...

no, we have nothing in writing at all... unsurprising my Father in law has avoided going to the solicitors!

It was a cash purchase...

when we agreed to this, it was on the understanding that the rent would be given to my Father in law on a short term basis, but as I've said he has had around £78k.

I am concerned that the house we live in will attract capital gains tax when and if we ever want to move.
I'm also concerned that he has not paid tax on the rent, and with the house in our name we would be liable despite never seeing a penny. I would also add that we have been paying a small mortgage on the house he gets rent from, but it would not offset the tax due.

I have been been told that I should ask my father in law to offset the rent he has received against the loan he made to us. We would then ask him to put the house in my husbands name, and have a charge over the property until we have paid him the £130k back. Also been told to agree a lump sum in respect of interest due, which we can pay him when we eventually sell. Is any of this making sense, is it good advice? Any hep much appreciated...

[Amethyst]

Is this your accountants or tax advisors advice ? Yes seems right but excludes any actual relationship.... It sounds like something has happened to make you question an arrangement that's been ongoing for 15 years quite informally, you've looked at the numbers and feel that your father in law has been unfairly benefitting from the arrangement somehow ? Are you considering moving maybe ?

You've been 'earning' the rent from letting out the property you own, and using that to pay rent on the home you live in. He's been letting out the home he owns ( to you) and receiving an income from that. So there are likely tax liabilities on both parties. Do you know he hasn't declared that rental income in his accounts /self assessment ?

Had you purchased the property at the time, and not had to rely on the generosity of your father in law, how much would you have been paying and what would your current balance be on a standard repayment mortgage ? I think that's a decent way to work out the actual cost/benefit . Had he rented the property you live in out to someone else - would he be better or worse off ? Had he done that he'd have the full value of the property available should he wish to sell it.

Would the sale of the property you own cover the £130k agreed price to purchase the property from your father in law ? It sounds like he hasn't changed his position in that figure - and the property has increased in value - possibly by more than you have invested into renovations etc?

Your position must feel a little precarious - no tenancy agreement and nothing in writing - and you've invested into the property that you don't own - so yes you do need to sort things out, but look at the figures very carefully and consider the benefit you have had from your father in law , in essence, buying the property for you at a time you were unable to - and consider future family relations carefully before making any approaches. You could end up losing the property altogether if no agreement to the arrangement can be proven and your father in law decides he's better off just keeping the house and letting it out to someone else.

If you do all your figures and you feel you have been done over somehow then you need to go to a solicitor to look at the options and ensure everything is in writing.

Just for example - I don't know how much in rent from your other house he's been paid and I've just assumed had you been able to get a 100% mortgage to buy it yourselves it would have been over 25 years standard repayment. Think it's worth doing the maths.
I'm not in a position to advise legally of course but we see many family disputes following loans etc on here that often don't end well.

[james_law]

In a nutshell, you still need to pay the 130k as agreed if you want the house to be yours. As amethyst said above, if you feel that you have paid excessive amounts of money you need to go get proper legal advice.

However again as pointed out does the fact your father in law bought the house for you etc outweigh everything else. If it was suppose to be short term why didn't you say something or do something after say 1-2 years, it was entirely up to you to sell your house and at what point in time.

Personally I would take this as a learning curve and actually sit down with your father in law and come to an agreement which suits both parties and is written down.