The deductibility of debts for inheritance tax (IHT)
purposes is a hot topic at the moment, following the changes introduced to IHTA
1984 by this year’s Finance Act.
However, it’s easy to overlook more mundane loans between family
members.
Not surprisingly, these loans often remain undocumented as
they tend to be informal arrangements.
However, that rarely makes for good IHT planning.
How can it be demonstrated to HMRC that a transfer of money
from a child to his mother to make her life a little more comfortable was a
loan and not a gift, after the mother’s death?
If it’s a gift, 40% IHT may be due on the mother’s death on the amount transferred
and unspent. If the money was lent by
the child instead then, unless the debt is disallowed because of section 103 FA
1986 (e.g. pre-loan gift by mother to child) or not legally enforceable, the
money should not form part of the mother’s estate for IHT. Also, as a result of the Finance Act changes,
the loan may have to be repaid to the child before the estate administration is
completed if it is to be deductible for IHT, unless any of the section 175(2) IHTA
1984 exceptions apply. Using a deed of
gift or loan agreement would help put matters beyond doubt.
Another classic trap in this area affects parents who have
made loans to children. The child is
convinced that the loan was waived more than seven years before the parent’s
death. But HMRC are quick to point out
that loans cannot be waived unless by deed or for consideration. We don’t enjoy having to be the bearer of bad
news to bereaved children! Intra-family
debts need documenting and, ideally, the tax implications considered, before
funds change hands.
Documentation also helps reduce another potential problem
with intra-family debts: intra-family disputes.
