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Where Taxpayers and Advisers Meet

Reducing IHT liability with loan and gift-back

TerryH
Posts:6
Joined:Thu Jul 28, 2022 8:09 pm
Reducing IHT liability with loan and gift-back

Postby TerryH » Thu Jul 28, 2022 8:27 pm

My wife and I potentially have estates well over the IHT threshhold. In our early 60's. we have plenty of time to reduce these - we hope. We own c. £3m in residential property, amongst other assets and don't want to downsize or give away a share to our 3 adult children, 2 of whom currently live with us. Does the following scheme work?

i) Give the children £1m which they invest in low risk assets.
ii) Wait 7 years.
iii) Borrow £1m from the children as an interest free loan repayable on death of both parents, secured on the property.
iv) Give the children £1m again ie gift to them the cash which we have borrowed from them.
v) Wait another 7 years.

Our net estate should then be reduced by £1m.

strawn
Posts:96
Joined:Fri Jun 01, 2012 10:11 am

Re: Reducing IHT liability with loan and gift-back

Postby strawn » Fri Jul 29, 2022 12:45 am

iv) seems a weak point to me. Won't HMRC simply look on that as you repaying your debt to them?

You could always look at
https://uk.practicallaw.thomsonreuters.com/6-536-0466?transitionType=Default&contextData=(sc.Default)

bd6759
Posts:4262
Joined:Sat Feb 01, 2014 3:26 pm

Re: Reducing IHT liability with loan and gift-back

Postby bd6759 » Fri Jul 29, 2022 7:59 am

You don’t want to give away anything to to your children, but step 1 does just that.

Having done step 1 you have reduced your estate by £1m. Steps 2 - 5 are obsolete.

Why wait 7 years before step 3?

What happens if your children choose not to lend you any money?

AGoodman
Posts:1738
Joined:Fri May 16, 2014 3:47 pm

Re: Reducing IHT liability with loan and gift-back

Postby AGoodman » Fri Jul 29, 2022 10:15 am

The loan under (iii) isn't deductible from your estates - s.103 Finance Act 1986

The net effect of steps 1-3 is that your taxable estate is the same. You're just £1m poorer but your children can't use the cash.

If you have £1m of spare cash, the best solution is just to give it to your children.

Either way, get some proper advice as most "cunning plans" were identified decades ago and covered by legislation or general anti-avoidance rules.

TerryH
Posts:6
Joined:Thu Jul 28, 2022 8:09 pm

Re: Reducing IHT liability with loan and gift-back

Postby TerryH » Fri Jul 29, 2022 8:34 pm

You don’t want to give away anything to to your children, but step 1 does just that.

Having done step 1 you have reduced your estate by £1m. Steps 2 - 5 are obsolete.

Why wait 7 years before step 3?

What happens if your children choose not to lend you any money?
No. We don't want to give property to children. This is fraught with complications. It can be a gift with reservation. We would need to consider who lives where and who pays what costs and what rent. We have no issue giving cash.

Thee resaon for waiting 7 years is so that the cash is not consideredto be property of the deceased under s.103

TerryH
Posts:6
Joined:Thu Jul 28, 2022 8:09 pm

Re: Reducing IHT liability with loan and gift-back

Postby TerryH » Fri Jul 29, 2022 8:35 pm

iv) seems a weak point to me. Won't HMRC simply look on that as you repaying your debt to them?

You could always look at
https://uk.practicallaw.thomsonreuters.com/6-536-0466?transitionType=Default&contextData=(sc.Default)
As regards (iv) it would all have to be documented properly.

Thank you for the reference will I will study.

TerryH
Posts:6
Joined:Thu Jul 28, 2022 8:09 pm

Re: Reducing IHT liability with loan and gift-back

Postby TerryH » Fri Jul 29, 2022 8:49 pm

The loan under (iii) isn't deductible from your estates - s.103 Finance Act 1986

The net effect of steps 1-3 is that your taxable estate is the same. You're just £1m poorer but your children can't use the cash.

If you have £1m of spare cash, the best solution is just to give it to your children.

Either way, get some proper advice as most "cunning plans" were identified decades ago and covered by legislation or general anti-avoidance rules.
It's not intended to be a "cunning plan" any more than any number of legitimate tax avoiding schemes which are touted by financial intermediaries. Of course I would not enter into a scheme involving such sums without taking the appropriate advice, but it doesn't hurt to test such ideas on forums like this one. I think "decades" is something of an exaggeration as the gifts with reservation rules have not existed quite so long. Anyways, our circumstances are rather special - not everyone has such assets! A gift of £1m reduces our estate by that amount (after 7 years). An artificial loan - ie one without genuine consideration - would fall foul of s.103. However, a genuine loan, from funds "cleansed" by 7 years having passed ought imho to step around the anti-avoidance provisions of s.103. Are you a tax advisor?

TerryH
Posts:6
Joined:Thu Jul 28, 2022 8:09 pm

Re: Reducing IHT liability with loan and gift-back

Postby TerryH » Fri Jul 29, 2022 8:52 pm

You don’t want to give away anything to to your children, but step 1 does just that.

Having done step 1 you have reduced your estate by £1m. Steps 2 - 5 are obsolete.

Why wait 7 years before step 3?

What happens if your children choose not to lend you any money?
I'm new to this forum.

Clunkily, I have replied to your questions in the wrong place, but it's easy enough to see what I said.

There is one final question you posed which is a good one. What happens if your children don't lend you the money? Well they have an incentive in that there is a high likelihood that if they do their assets will double by way of the gift. There might well be a tax point here in that the two might be construed to be linked.

TerryH
Posts:6
Joined:Thu Jul 28, 2022 8:09 pm

Re: Reducing IHT liability with loan and gift-back

Postby TerryH » Mon Aug 01, 2022 12:20 am

Having digested the various replies I thought I would sum up.

The scheme I suggested would work if I borrow £1m from a bank and give it to my children rather than borrowing from my children the cash I lent them a few years earlier. I'd have to persuade the bank to lend to me and pay them interest.

The following scheme also works, at least according to professional pieces I have read on the internet:

(i) Give £1m to children.
(ii) Wait 7 years.
(iii) Children buy £1m house which I go and live in rent free.
(iv) Sell existing house and give away proceeds to children.
(v) Wait 7 more years.

It doesn't have to be £1m, it can be any sum and just to be clear, for someone with liquid assets, this affords a route to live in an expensive property til death without it being in one's estate at death either directly or the through some deemed reservation of benefit.

I was trying to achieve something similar using similar principles. However, having been pointed in the right direction by a helpful answer here and studied s.103 of the 1984 IHT Act, plus having read a few professional pieces on that, I can see that my scheme probably would not work at all. s.103 is quite pernicious. It will defeat artificial loans but also genuine loans. Plus there appears to be no time limit on the connection between a loan being made and it being tied to "property derived from the deceased" - in contrast to the above scheme where after 7 years, money gifted and subsequently used is not tied to one's estate.

So it is not worth getting and paying for advice on this scheme and thank you for saving me the effort.


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