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Legal News | 25.09.19

Is it a gift or is it a loan – how are they treated on death?

A gift can be:

  • Anything that has value, such as money, property or possessions
  • A loss in value when something is transferred, for example, if you sell your house to your child for less than it is worth, the difference in the value counts as a gift.

What is a loan?

It can be difficult to establish whether a payment is a loan or a gift unless there is some sort of written acknowledgement/agreement in place. Even if a loan is to your friends or family, it is advisable to draw up some form of written agreement so that your intentions are clear.

For inheritance tax purposes, a loan is defined as a sum of money which you give in order to receive the same back in return either with or without interest. It is essential when making a loan that you agree the terms upon which the loan is made.

How are loans treated on death?

If a loan is still outstanding as at the date of your death, then it will be classed as an asset of your estate. Your personal representatives are under a duty to collect in the loan as part of the estate administration.

To give clarity to your executors as to your intentions, you can state in your Will that certain loans you have made do not have to be repaid – this will convert any such loans to legacies on death under your Will and so just as with an outstanding loan, the amount remains in your estate for IHT.

Alternatively, you could make it clear in your Will that you do wish for any outstanding loans to be repaid to your estate. If you decide in your lifetime to write off a loan that you have made you should document and date the agreement to do so as this will convert the loan to a gift at that date. If you survive seven years from the date the loan was written off, then the value will drop out of your estate.

Example 1

Mr Smith died on 10 September 2019. He has assets in his estate worth £300,000 at his death. He made a gift of £50,000 in September 2014, less than seven years before his death. The value of the gift must be added to the assets of the estate at death meaning the whole estate would be over the current Nil Rate Band threshold of £325,000 by £25,000.

Example 2

If instead, Mr Smith had made the gift in September 2011, 8 years prior to his death, the £25,000 value of the gift would fall out of his estate. This means his estate, being £300,000, would be under the nil rate band threshold so there would be no IHT to pay on his death.

Example 3

Alternatively, Mr Smith might have made a loan of £50,000 in 2015 (rather than a gift). In May 2016 Mr Smith then made an agreement with the borrower that the loan would be excused at that date. Upon making this agreement, the loan would be converted to a gift. The gift was therefore made in May 2016, 3 years before Mr Smith died and so the value of the gift remains in his estate for IHT. (Taper relief is not relevant here as the gift itself was well below the nil rate band and simply uses up part of the nil rate band leaving a smaller proportion of the nil rate band available to be applied to the estate at death.)

Example 4

However, if Mr Smith made the loan and had not excused the loan in his lifetime the value of the loan outstanding at his death would remain in his estate as an asset. His executors would have a duty to call in the loan and their job would be made much easier if he had signed a written agreement detailing the loan provisions and if his Will contained a statement confirming that Mr Smith’s intention remained for the loan to be called in upon his death.

For more information regarding gift exemptions and taper relief, both of which are touched upon within this article, please refer to our articles from July 2019 and December 2018.

Click these links:

July 2019 – Taper Relief on Gifts Made Less than Seven Years Before Death

December 2018 – Who’s been naughty and who’s been nice? ….

For further information regarding the matters covered in this month’s article, please get in touch with your usual contact at Wansbroughs or email wealth@wansbroughs.com


Posted By Our Wills, Tax, Trusts & Probate Team