How do I value a Medium term loan note for Inheritance?

[dominoman]

My father loaned some money to a company before he died, in a medium term loan note (MTN), paying 8% interest, and expiring in 2023.

These loan notes were issued by a private corporate broker, and there is no market for them so the beneficiaries would have to hold them to maturity (2023) or sell them back to the broker at a big discount.

How do we value these notes for Inheritance Tax purposes? I presume not at full face value?

Thanks for any help.

[maths]

The value of the asset is its market value at the date of death discounted for the lapse of time between date of death and the repayment date.

IHTA 1984 s 160.

[dominoman]

Thanks. But how should we calculate the market value given that these are risky loans and there is no secondary market for them (and hence no market value)?

[maths]

The lack of a secondary market is irrelevant.

The relevant section 160 creates a hypothetical market place with hypothetical seller and purchaser and a hypothetical sale. It's all a bit strange.

[dominoman]

OK many thanks.

I think in the case of my father's notes they would be valued at par, given they were issued at par only a couple of months before death. But I didn't understand when you say they are "discounted for the lapse of time between date of death and the repayment date".

Does that mean we should discount them below par because they can't be repaid for 5 more years?

[AGoodman]

Yes, if it weren't for the interest. I suspect the 8% interest compensates for the delayed repayment but this depends on the risk profile of the company. It might even garner a small premium over par if the capital is considered safe (e.g. if the borrower was a property investment company in a secure position). Given the current environment, I suspect par might be seen as a fair value. If the company is struggling, there could be a discount.

As maths says, you have to assume that there is a willing buyer but I think you can take into account that this hypothetical buyer would take the illiquidity into account when buying the debt; however three years is not necessarily very long if the debt is a safe investment.

[maths]

A rate of 8% interest per annum over the next 3 years (the remaining life of the Note) in today's climate is relatively high. Assuming for discussion a rate of 7% could be obtained today the discounted value of the bond per 100 units of principle would be approximately 102 ie slightly above par.

The Note is unsecured.

Adopting a market value of par would not seem unreasonable although HMRC could, I feel, argue for a slightly higher market value.

[maths]

"principal" not "principle" !!

[dominoman]

Many thanks for the help.

I think we'll submit it valued at par and see what they say.

I was just checking there was no legitimate way to reduce IHT on loan notes, similar to things like Business Property Relief (and Replacement BPR) for equity stakes.

Thanks. This forum has been a godsend in providing info on all kinds of matters.