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Where Taxpayers and Advisers Meet

Does an unpaid off loan become part of the estate?

gawj1512
Posts:9
Joined:Sun Jul 22, 2012 11:16 pm
Does an unpaid off loan become part of the estate?

Postby gawj1512 » Sun Jul 22, 2012 11:27 pm

Hi all :)

Hope you can help and would be most grateful as I've been trying to research the answer to this for the last 30 hours with much confusion and little sleep.

My father is a single man of 62 with a decent value. His will splits everything down the middle between my sister and I. He owns a rental property and also his own house, which is part mortgaged.

He currently has a 6 figure sum of money invested in a plan that pays him interest monthly and he uses the money to live off together with the rental income. It's a modest amount but enough for a single man. However, following a health scare (now under control) he feels he would like to withdraw the money from the plan and split it between my sister and I for her first property and my property upsize.

He has hoped to be able to simply gift us the money and live long enough for it to fall outside the estate.

The problem is this. He needs to realise the same or similar income every month that he currently benefits from with the plan. After making several suggestions on my part, including joint mortgages and paying him rent etc. I decided that he would pay income tax on this and it seemed a silly idea. So if he loans us this money interest free, we repay him every month the amount he needs to live, thus he spends it on his household bills, food, holidays and the money gradually also falls out of his estate. Good? Well no... here's why I am concerned. If he dies before we pay it back, will the debt will then become part of the estate again? And since we are the both the borrowers and the beneficiaries, do we then owe the money to ourselves? Does this cancel itself out or will it still be part of the estate and therefore included in the bill for IHT?

The question isn't just Gift or Loan, because if he didn't need the monthly income it would definitely be a no brainer - Gift! But if the only alternative is Loan, are we shooting ourselves in the foot in the long run? Sorry it's complicated. Please feel free to ask questions!

Lee Young
Posts:2707
Joined:Wed Aug 06, 2008 3:26 pm
Contact:

Re: Does an unpaid off loan become part of the estate?

Postby Lee Young » Mon Jul 23, 2012 8:52 am

The balance of any loan owed to your father at the date of his death is an asset in his estate and will therefore be added to all his other assets and IHT charged accordingly. It makes no difference that the money is owed to his beneficiaries.
Lee Young
Solicitor, Chartered Tax Adviser and Trust and Estate Practitioner


Partner, Frettens LLP
lyoung@frettens.co.uk
01202 491701

AvocadoK
Posts:1232
Joined:Wed Aug 06, 2008 3:46 pm
Location:Lancashire

Re: Does an unpaid off loan become part of the estate?

Postby AvocadoK » Mon Jul 23, 2012 9:07 am

The other issue is, what happens if you repay the whole loan before he dies, so his income dries up. Will you be able to support him? What if - due to circumstances you cannot foresee now - you can't?

gawj1512
Posts:9
Joined:Sun Jul 22, 2012 11:16 pm

Re: Does an unpaid off loan become part of the estate?

Postby gawj1512 » Mon Jul 23, 2012 9:35 am

We wouldn't repay him before he dies. Not the amount and not at that rate, is that even allowed?

So could he gift us the money and then we gift him money back each month to live?

gawj1512
Posts:9
Joined:Sun Jul 22, 2012 11:16 pm

Re: Does an unpaid off loan become part of the estate?

Postby gawj1512 » Mon Jul 23, 2012 9:36 am

We wouldn't repay him before he dies. Not the amount and not at that rate, is that even allowed?

So could he gift us the money and then we gift him money back each month to live?

gawj1512
Posts:9
Joined:Sun Jul 22, 2012 11:16 pm

Re: Does an unpaid off loan become part of the estate?

Postby gawj1512 » Mon Jul 23, 2012 3:52 pm

Does nobody have any ideas please?

gawj1512
Posts:9
Joined:Sun Jul 22, 2012 11:16 pm

Re: Does an unpaid off loan become part of the estate?

Postby gawj1512 » Mon Jul 23, 2012 5:08 pm

I should also mention we have already paid IHT on this money 3 times. It's passed from my dad's aunts husband, to my dad's aunt, to my dad's mum to my dad. None of them have spent it, we've lost so much money from it already, it just feels heartbreaking to consider paying it again. We need to spend it.

AvocadoK
Posts:1232
Joined:Wed Aug 06, 2008 3:46 pm
Location:Lancashire

Re: Does an unpaid off loan become part of the estate?

Postby AvocadoK » Mon Jul 23, 2012 5:23 pm

from my dad's aunts husband, to my dad's aunt
That sounds like a transfer between spouses, so there is no IHT there.
We wouldn't repay him before he dies
How do you know? If say there is £500,000 and you repay £25,000 a year, it will last 20 years. What happens then? If you KNOW he won't survive 20 years but might live for ten, he might consider giving £250k outright and loaning £250k.

Or he could leave it all to charity.

Lee Young
Posts:2707
Joined:Wed Aug 06, 2008 3:26 pm
Contact:

Re: Does an unpaid off loan become part of the estate?

Postby Lee Young » Mon Jul 23, 2012 5:25 pm

Did your dad's aunt or mum die within the last two years? Or within 5 years of eachother?
Lee Young
Solicitor, Chartered Tax Adviser and Trust and Estate Practitioner


Partner, Frettens LLP
lyoung@frettens.co.uk
01202 491701

tax_schmax
Posts:392
Joined:Wed Aug 06, 2008 3:53 pm

Re: Does an unpaid off loan become part of the estate?

Postby tax_schmax » Mon Jul 23, 2012 5:31 pm

If your primary concerns are avoiding IHT and maintaining your fathers income, special trusts can do this for you in a very easy to manage way. If the legacies are something that you would benefit from and your father would enjoy seeing during hos lifetime, paying back your father gradually seems like a reasonable idea. As has already been stated, the outstanding loan is added to your fathers estate, and is thus going to be taxable for IHT once more.


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