A loan was made to a sibling (lets call them the Borrower) 7 years ago to try and help them save a business (the Borrower was unable at that time to borrow funds from any financial institution due to being under Administration). Very little repayment had been made to date. The Lender and Borrower are now in negotiations to have this loan repaid over the next 3 years. The offer from the Borrower is to pay a high rate of interest with the principal to be paid out towards the end. The Lender is concerned about the tax implications.
Question 1.
Will the interest need to be declared when paid even though there will be around 5 years worth of interest paid over the next 3 years ie in effect there will be a backpay of interest (possibly putting the lender into a higher marginal tax rate) or does the Lender need to amend earlier tax returns?
Question 2. If the answer to Q1 is that the interest must be declared in the tax year that it is received does that also mean that the Borrower can only claim the interest paid (through their business) in the tax year that it is actually paid ie even if the calculation of the interest is from a previous tax year
Question 3. Does the Lender need to declare ALL the interest as income - even though the Lender has borrowed the money from their bank and is paying interest themselves.
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