Family loan US to UK - tax implications?

Hi all.  This is my first post. 

I've been living here in the UK for nearly 11 years (ever since I went to university - err college). I'm a permanent resident and have really no ties to the US other than my family. I'm now going to take the plunge and buy a home (2 bedroom - nothing fancy). Now comes the complicated part deserving this question! My parents have graciously offered to buy some equity in the flat and consequently lay down the great part of the deposit. It may add up to approx $60k. Now, they were thinking of "gifting" this to me as a good faith gesture and avoid formal agreements and legalities.

Is this even possible? I realise the money can technically be transferred without much headache, but what does this mean tax wise?  It makes no sense to have them offer this money if they lose 25-30% or so with me paying income tax... this would make it completely pointless really. Must I pay tax on this? If technically yes, who would report this money? Myself? The bank? Is big brother watching? The money would be repaid to them if I sell the flat (with interest but thats another conversation) ... it is really a good-will gesture on their part to help me out more than a real financial winner for them.

I realise some people may suggest I use a US bank card at the ATM every day but is this the wisest thing? Do I need to take 6 flights? What would happen if they just transferred the money?

Many thanks - looking forward to any advice or thoughts. Also if anyone has further issues I haven't considered please mention them.

What about the tax implications for your parents - giving you that kind of money outright?  Or is the flat going to be purchased in their names?  Because if I'm not mistaken they will have to pay US tax on that kind of money - you can give up to $10k a year as a gift tax free...after that they would have to pay a gift tax.  I'm sure the tax gurus will comment with more accuracy.  But it seems like it would be better for them to buy it rather than you.

Thanks for the thought geetak.

I never considered that. That actually doesn't make much sense to me. Thats an odd law. Its almost like a VAT or sales tax on gifts?

They wouldn't be able to buy the place, as the rest of the amount (considerably more) for the mortgage would be covered by myself over the next 25 years.

There would also be anti-money-laundering rules to consider, for such a large amount of money being transferred between countries.

I never considered that. That actually doesn't make much sense to me. Thats an odd law. Its almost like a VAT or sales tax on gifts?

They wouldn't be able to buy the place, as the rest of the amount (considerably more) for the mortgage would be covered by myself over the next 25 years.

The article I just read (below) said that it was designed to prevent people from giving huge amounts of money to their heirs before they die so they can avoid inheritance tax.  Oh and I just read the amount is up to $11,000. 

http://www.turbotax.com/articles/TheGiftTax.html
http://www.finance-glossary.com/terms/gift-tax.htm?id=620&ginPtrCode=00000&PopupMode=False

They could rent the place to you though, rather than you actually owning it.  And if something should happen to them (god forbid) they could will it to you.  My parents did this when I graduated from college and had my first job in Chicago.  In essence they paid the down payment and I paid the mortgage.

i'm sorry for not having more specific info for you.  but i am a USC living in the UK.  purchased my first home in oct 05.  i ended up selling a bunch of mutual funds in the US to release the money to pay for the house here.  however, i went and saw an account about it.  while there we talked about the most tax effective way to do this.  one of the options they floated was a "loan" from my father to myself.  aparently this can be tax effective.  as this isn't the route we took, i don't have any more info about it.  i really would consult a US/UK tax advisor.  can be pricey upfront, but save you hassle later on.

meggles is right, the whole thing can be hairy.

Taking a loan that is repayble can reduce your exposure to UK inheritance tax because you have less assets in the UK.  However your parents would have deemed interest income to report on their US tax returns each year.

Having your parents make a gift of more than $11,000 out of their love for you, would cost no tax currently but would eat into their lifetime gift tax exclusion in the US. 

If you do what meggles did, that is sell US mutual funds and then remit the proceeds to the UK then the gains on these are taxed as income in the UK (subject to tax of up to 40%).

You are worried, I think, that bringing the gift into the UK would somehow make it income or gains in  your hands and therefore you'd owe bunches of UK tax.  Please be reassured that this is NOT the case (phew!).  The money is capital when you get it in cash and can then all be wired over here and spent as you like.

You will of course in any case want to consider UK inheritance tax as you come closer to becoming deemed domiciled here for inheritance tax purposes.

Phew indeed! Thank you everyone for your comments and concerns.

Geetak's comment regarding gift tax got me researching the subject and I've learned a few things. First, it appears a family member can loan another family member up to 100,000 USD as long as it is deemed a loan (with some written agreement), and has an interest rate at least as high as one set by the IRS. Then, it is up to the lender (my parents in this case) if they wish to actually ask the debtor (me) for this money OR claim it as part of the 11,000 gift allowance. So for example, if the loan is 100k and the interest is 5%, the interest would be 5k (easily under the 11k limit) and could presumably be forgiven if they chose to do so.

Regarding inheritance tax in the UK, it appears that as long as one parent survives for 7 years after the money is given, this is not considered inheritance.

More information can be found here from H&R Block:
newcomer link: http://www.hrblock.com/taxes/planning/planning_101/loans_to_family.html [nonactive]

It also seems fairly common in the UK for parents to freely loan their children money for purchasing a house:
newcomer link: http://www.thisismoney.co.uk/mortgages/mortgages/article.html?in_article_id=406361&in_page_id=58 [nonactive]

This is all seemingly helpful information and solidifying in my mind that, with the proper documents drawn up, this shouldn't be too difficult or in any way illegal. BUT if anyone thinks I'm being naïve and misunderstanding this, please do warn me. Let the thread continue.

Thanks again

* Just a note about the potential for my parents purchasing the house - it doesn't appear to me to be an option. They reside in the US and with today's house prices, their contribution will 'only' be approximately 15-20%, my wife and I will need to come up with the rest.