Minimizing Inheritance Tax

[maths]

I set out below the answer I provided in Taxation magazine to a not dissimilar query:

"IHTA 1984 s5 allows liabilities of the deceased to be taken into account when computing the deceased’s estate on death. S272 requires that such liabilities are incurred for a consideration in money or money’s worth. A simple contract debt is sufficient.

In the present case the issue arises as to whether or not the transaction(s) between father and son are/were intended to be that of debtor/creditor or whether it was agreed, explicitly or implicitly, that the father was not, de facto, under any obligation to repay the monies to the son ie the transfers from son to father are simply outright gifts. The answer turns on any evidence which may be adduced to support that the nature of the transaction was intended to be that of a loan(s) and not a gift(s).

HMRC will require that it can be established that there was a written or oral agreement between the father and son at the time the debt was created and that the father intended to repay the amounts borrowed (ie the debt is legally enforceable); actual repayments will lend prima facie support to the existence of a loan between the two.

It is not satisfactory for the father to now agree that the nature of the transaction is a loan which he now agrees to repay; this is so-called “past consideration” (Dent v Bennett (1839)) even though it is not technically consideration. In this regard, HMRC state “A statement made by the deceased after the event is past consideration and the debt is not enforceable in general law and not allowable as a deduction for inheritance tax purposes”.

In an arm’s length scenario, a loan from A to B would typically be documented in writing setting out inter alia the rate of interest to be charged; whether the loan was secured or not; the repayment terms and the consequences of breaching the terms of the agreement. The documentation would normally be signed and agreed in advance of the loan being advanced.

I have assumed that FA 1986 s103 is not in point which would, were it in point, result in a disallowance of the debt. Broadly, the section is in point where the monies loaned (by the son) were “derived” from the borrower (the father)".

[pqtaxation]

Any thoughts on this issue would be much appreciated!

I can’t say I have experienced any disallowance by HMRC of interest-free balloon mortgage loans in cases similar to yours even though written documentation of the agreement has been prepared subsequent to the transaction and did not fully address all the aspects usually covered by a mortgage loan agreement.

But Maths’ lengthy analysis in his last post deserves respect and he cautions over the risk of “past consideration”.

Your specific circumstances will, I suppose, affect your decision about what to do -- e.g. how long ago was the property purchased and are there any independent witnesses (for example, a solicitor, chartered accountant, clergyman) to the verbal agreement between you and your mother who would be willing to prepare a witness statement and confirm that the terms of the written agreement are those of the verbal agreement.

But there seems no reason for you not to acquire an interest in the property, as mentioned in my penultimate post, to extinguish the liability.