Gift or Loan?

[pdonnar]

If a parent wishes to give his son/daughter a large sum, say £250K, towards the purchase of a house, is it necessary to formally disclose whether it is a gift or a loan at the time the money is transferred. For example, if a loan agreement is signed between parent and child can this be kept private and produced later, or not, as necessary? This would allow the parties to decide later whether it is a loan or gift, according to circumstances.

[section 44]

This would allow the parties to decide later

Decide retrospectively? Sounds potentially like fraud (if they sign a loan agreement and then realise that it may have been better to have a gift, would they destroy the loan agreement and pretend that it never existed?).

If the money was a gift then it was, and always will be, a gift (I assume that you understand what a gift is). If the money was a loan then it was a loan at the time that it was made and there would remain a loan until repaid or written off/waived.

[tax_schmax]

For avoidance of any doubt, it would be useful.

It will have to be one or the other. I don't really see how a gift can become a loan, although I regularly see loans becoming gifts.

[section 44]

A gift can never become a loan.

[maths]

No.

I set out below an extract from an answer I provided elsewhere to a similar (although not identical query) which I trust may help:

"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".

[Incredulum]

Ah, Maths lives in a world where everything is so black and white!

I would suggest that many transfers of cash between parents and children fall into the following categories:

1. An amount of cash that falls somewhere between a loan and a gift. On a "well, if in the future you are able to repay it and I need it then you may be asked to give me some money back."

2. An amount that begins life as a loan, but is never repaid. The point at which it ceases to be a loan and becomes a gift may be far from obvious.

3. An amount that was always perceived by the donor as a gift, and the donee as a loan; and vice versa an amount always perceived by the donor as a loan and the donee as a gift. "I'll help you buy a house" - is that a loan or a gift?

[Incredulum]

On the other hand, if a loan agreement is signed, as per OP, then later to deny its existence is, of course, fraud.

[maths]

Ah, Maths lives in a world where everything is so black and white!

Absolutely; life (and tax) is then so much easier. Grey doesn't exist in my little world.......nor do i allow it in my clients' world.

I have little doubt that in the real world (which I try and avoid if at all possible) a parent may transfer cash (say £100K) to say the son. The son says "look dad, there may be some tax implications here so let's leave it all a bit vague, no paperwork and see what happens". Dad dies unexpectedly two years later.

Son (having been on an IHT course) says to mum, "look, mum, if dad had given me the 100K it's now subject to 40% IHT (as dad had used his nil rate band) and I (ie the son) have to find 40% of 100k, ie 40K IHT, which as an aside i of course don't have. I think it would be better to treat the 250K as a loan to me; although this doesn't change the IHT charge it is the estate not me who then has to pay it (out of dad's residue)".

Alternatively, dad lives for 7 years after transfer of monies and son says "dad, let's treat it as a gift; then no IHT".

Under either option, with the benefit of hindsight, paperwork is then created and backdated.

In Incredulum's examples, again, i have little doubt that such happens.

However (particularly with large sums), the law will reduce the issue to one of black or white (I like it !); the transfer will be categorised as gift or loan, not some hybrid, for better or worse and woe betide the taxpayer who tries to sit on the fence pending the outcome and gets caught executing a bit of back-dating !!

Incredulum, wouldn't you like to be in my world ??????

[Incredulum]

Incredulum, wouldn't you like to be in my world ??????

There's an invitation! It would do me (and you!) out of a job....

[section 44]

What is, and is not, a gift is fairly black and white.

1. An amount of cash that falls somewhere between a loan and a gift. On a "well, if in the future you are able to repay it and I need it then you may be asked to give me some money back."

That is not a gift.

2. An amount that begins life as a loan, but is never repaid. The point at which it ceases to be a loan and becomes a gift may be far from obvious.

It may not be obvious or readily ascertained but it could be ascertertained.

3. An amount that was always perceived by the donor as a gift, and the donee as a loan; and vice versa an amount always perceived by the donor as a loan and the donee as a gift. "I'll help you buy a house" - is that a loan or a gift?

If it is perceived by the donor as a gift then it is a gift, irrespective of whetehr or not the donee perceives it as a loan because there would not be a legal obligation to repay and the donee is wrong in his understanding (and vice versa).