Money to child and back

[akis_t]

Hello everyone

I have some money which I would like to invest. Whatever income or capital I make will be liable for higher rate tax. I was thinking of giving the money to my son (age 18) who does not work and has all the tax free allowances unused. He can invest the money and pay no tax, or very little tax. I am not up to date with taxation on dividends, capital gains, I admit. I suppose however that as he has no income he would be paying no tax. I also know that if I die within 7 years of the transfer, then he will be liable to pay (some) inheritance tax. However if after some time he returns the capital back to me, then he will not be liable for any inheritance tax. Maybe for example he "borrows" the money from me and after some time he returns it.

I would like to ask your opinion, am I understanding the process above correctly?

Many thanks in advance.

[someone]

I think you are confused.

A gift would work for IHT purposes (provided you live seven years) but you would not be entitled to a repayment of the money at any stage. Nor would you be entitled to any income earned or be able to control how it was invested.

A loan would not affect your estate for IHT purposes. If your goal is to give the income earned from the capital to your son in as tax efficient way as possible then an interest free loan might work but if your intention is to receive the income then I believe you will still be liable for income tax on the income.

[akis_t]

Hello and thank you for your reply.

The way I understand it (please correct me if I am wrong).

Supposing I give £100,000 to my son to invest or to do as he pleases. No matter what follows after, he will be liable for inheritance tax on the £100,000, if I die within 7 years. Supposing that after a few years he returns the money to me. Now I will be liable for inheritance tax, if he dies within 7 years.

To avoid this taxation, I could lend my son the £100,000 on which I could charge him a nominal interest. Then at some time in the future he will return the money to me, and there will be no tax to be paid, except maybe I will be liable for income tax on the interest payments my son is making on his £100,000 loan.

Does this make any sense at all?

[someone]

Yes. That makes sense.

Note that you'll only be liable for income tax if your estate exceeds the IHT threshold.

From what you've said so far it seems unlikely that a gift from your son to you would incur any IHT should he predecease you as it doesn't sound like he would have much of an estate anyway.

And your son won't be liable for IHT on your gift to him either unless you've made other gifts so that this gift takes you over the threshold. The rest of your estate will be as if the gift hadn't happened but there's no IHT on gifts themselves unless they're for more than the allowance.

The IHT on your estate will be the same whether you gift of make a loan if you die within 7 years.

If you gift to your son and then he dies you won't automatically get the money back unless he's made a will in favour of you.

IMO "gifts" where at the time the gift is made there's some intention that it will be "gifted" back aren't really gifts at all and ought to just be considered interest free loans.

[SteLacca]

You are effectively proposing a gift with reservation, which would fail any test for relief from IHT.

Even worse, such a proposal within the terms that you have expressed would fall foul of the general anti-abuse rules (GAAR), being an artificial structure set up where the main, or one of the main purposes is the avoidance of tax, and could be subject to a couteraction notice by HMRC, which would effectively restore the default taxation position (the money would remain in your estate for IHT purposes, and any tax arising would be assessable on you). However, HMRC could also charge penalties if caught by GAAR.

[akis_t]

Thank you for the great advice.

I assume therefore that when the child needs cash, for example capital to buy his house, a loan from parents to child would be considered an artificial scheme designed to avoid IHT ?

[maths]

I assume therefore that when the child needs cash, for example capital to buy his house, a loan from parents to child would be considered an artificial scheme designed to avoid IHT ?

Incorrect.

The issue is straight forward.

You can loan monies to child OR you can gift monies.

What you cannot do is purportedly gift monies to son but on the mutual understanding that it's really still yours and he will give it back to you when you want it; this would constitute tax evasion to the extent you failed to disclose any income arising on the monies in your own Tax Return.

[akis_t]

Thanks for replies much appreciated.