I5
INTEREST RELIEF – FAMILY ARRANGEMENTS MADE TO ASSIST IN THE
PURCHASE OF A FAMILY MEMBER’S PRINCIPAL PRIVATE RESIDENCE (The
Income Tax (Tax Relief on Interest Payments) (Guernsey) Ordinance 2007, section 17)
Introduction
It has come to the Director’s attention that it is not uncommon for family members to obtain
borrowings (often secured on their own principal private residence) for the purpose of
advancing those funds to another family member to enable that person to purchase their own
principal private residence. (For example, parents obtaining a mortgage on their own home to
advance the monies to their son and daughter-in-law to supplement other financing, obtained
by the son and daughter-in-law, to purchase a principal private residence for them. This
example will be used throughout this Statement of Practice for illustration purposes.)
Such family arrangements are often loosely constructed such that a formal loan agreement
may not exist between the family members but may entail the son and daughter-in-law merely
repaying the amount of the monthly payments on the loan to the parents.
Statutory Position
It could be argued, particularly in the case of a loosely constructed family arrangement, that
the son and daughter-in-law have not borrowed the money which has been obtained from the
parents and that the borrowers who have obtained the monies from the bank are the parents.
The requirements of section 1(1) of the Income Tax (Tax Relief on Interest Payments)
(Guernsey) Ordinance 2007 (“the Ordinance”) would not have been met and the son and
daughter-in-law would not be entitled to relief in respect of the interest paid.
If it was accepted that the son and daughter-in-law were the borrowers, the parents may not be
entitled to relief in respect of the interest under the Ordinance or under the Income Tax
(Guernsey) Law 1975 (“the Law”) but it could be argued that the parents are liable to income
tax on the interest element of the payments being made to them by the son and daughter-inlaw as income of class 2(1)(d) relating to income from other sources.
Director’s Interpretation
The Director recognises that if the provisions of the Ordinance and the Law were applied
strictly to situations such as those described in the introduction above, it may result in either
relief being denied or persons being taxed in unintended circumstances. The Director is,
therefore, prepared to interpret the Ordinance and the Law as described in the concessionary
treatment below.
In this Statement of Practice, the example used is that of parents and their son and daughterin-law, but other reasonable family arrangements may be considered on a case by case basis.
It will, however, be necessary for the claimant to demonstrate to the Director that to grant this
concessionary treatment would not be outside the spirit of the legislation or this concession.
Concessionary Treatment
Provided the parties involved submit a declaration in the format shown below, with their
annual income tax returns, and the person claiming the interest (in this example, the son and
daughter-in-law) also attaches evidence of the amount paid to the parents in reimbursement of
the interest and related repayments of capital they have paid then:
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1.
The Director will accept that the son and daughter-in-law should be treated as
“borrowers” for the purposes of the Ordinance and will allow them income tax relief
under the Ordinance, subject to the usual rules and limits.
2.
The Director will interpret section 17(1) of the Law such that he accepts that the interest
being received by the parents from the son and daughter-in-law need not be brought
into charge, as long as that interest is no more than the interest being paid on the loan
by the parents to the bank.
This treatment is intended to leave the parents in a tax neutral position and to recognise
that they are, in effect, merely a conduit for the additional borrowing applicable to the
son and daughter-in-law. If there should be a surplus of interest paid to the parents, that
will be taxable under section 17(1). If there should be a deficit suffered by the parents,
the deficit will not be allowable for Guernsey income tax purposes since the interest
would not normally be allowable to the parents in any event. IMPORTANT If the son
and daughter-in-law do not reimburse the parents for capital as well as interest, the
benefit of this concession may be withdrawn.
3.
For the avoidance of doubt, as indicated in 2. above, the interest cannot be claimed as a
deduction for income tax purposes by the parents.
Note
The concessionary treatment above will only apply to interest paid on any monies borrowed
on or after 1 January 2008, by parents, or other family members, from an individual resident
in Guernsey or a company subject to tax in respect of income of class 2(2)(a) (income from
banking business) at the company intermediate rate, such that the interest payable on the loan
advanced to the parents is liable to Guernsey income tax.
Declaration
The declaration required to be made with the annual income tax returns by the parties is
shown below. The declaration must be completed fully in both Parts A and B, signed by all
of the parties concerned and attached to each of their respective income tax returns.
Published: 08.06.10
Revised: 2011 / 2014
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EXAMPLE
This is an example for illustration purposes only
The version of this form that should be used for completion can be downloaded
at http://www.gov.gg/forms under “Interest relief - family arrangements (form 678)”
Declaration in accordance with Statement of Practice I5
Interest Relief – Family arrangements made to assist in the purchase of a family member’s
principal private residence
PART A (to be completed by family member borrowing from the bank)
I/we
[name of parents or other family member] confirm that I/we borrowed the sum of £
from
[name of bank] on
[date] and that these funds were loaned on to
[name of son and
daughter-in-law or other family member] to assist in the purchase of the property
[name and
address of property] acquired by them. Their relationship to me/us is
[complete nature of
relationship].
I/we confirm that the balance outstanding on the loan at 31 December
[complete year] was £
and the amount of interest charged to me/us on the loan during the calendar year
[complete year]
was £
and that I/we have not claimed this interest on my/our Guernsey income tax return.
I/we attach evidence of the amount of interest we have been charged by the bank and confirm that we
have received reimbursement for this interest and the loan repayments made from
[name of son
and daughter-in-law or other family member].
Signature etc …..
PART B (to be completed by member of family reimbursing the person in Part A)
I/we
[name of son and daughter-in-law or other family member] confirm that during the calendar
year
[complete year] I/we have reimbursed
[name of parents or other family member] the
amount of £
in respect of the monies loaned on to me/us in Part A of this declaration, of which the
sum of £
related to interest during that calendar year, and evidence of the payments made is
attached.
Signature etc …..