Q&A – My Mum and Dad loaned me some money for my divorce, is this taxable?
Personal Tax » May 24, 2024
We will be publishing some of the most frequent questions we have received and our answers to them. Please note we have changed some parts of the questions to protect client’s information. You should always seek professional tax advice before taking any action.
Q: I have recently commenced divorce proceedings and my Mum and Dad have loaned me £100,000 and I’ve agreed I will pay them back £100,000 plus interest. Is there any tax payable on this?
A: BOMAD (Bank of Mum and Dad) loans are becoming increasingly popular in general and we are seeing this increase even more concentrated when a child is going through divorce.
Will your parents pay tax when you repay the loan?
When you receive the loan from your parents, you will not have any taxes to pay. Loans are not taxable income. When you repay the loan, your parents will not have any tax to pay on the loan amount (this is the £100,000).
What might they have to pay tax on?
Any interest you pay to them will be taxable interest in their hands.
The interest you pay on the loan is classed as savings income. Everyone has a personal savings allowance. The amount of the allowance depends on the individual’s other income.
How much tax might my parents pay on the interest?
If their other income is under £50,270, their savings allowance is £1,000 (meaning they only pay tax on the interest received above that amount). If their other income is over £50,270, their savings allowance is £500 (meaning they only pay tax on the interest received above that amount).
If the interest exceeds their saving allowance, they will have tax to pay on the interest at either 20%, 40% or 45%. The rate of tax they pay depends on the level of their total income.
What other options are there?
If your parents forgive the loan, it becomes a gift and is deemed a potentially exempt transfer (PET) for inheritance tax purposes (IHT). If your parents survive from seven years from the date of the gift (ie the date that they forgave the loan), there will be no inheritance tax to pay.
If your parents pass away within seven years of the gift, there may be an inheritance tax liability on the loan. This will depend on the other gifts your parents have made and the availability of their nil rate band.
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