Your car breaks down and you can’t afford to have it fixed straight away so a friend loans you the money. After a couple of months of monthly payments, your friend offers to write off the debt as a gift to you! You may believe it is easy to determine whether something is a gift or a loan. A simple text or phone call may be enough in this situation for the loan to become a gift.
However, in regards to Estate Planning, making a loan or gift is not this simple! There are criteria that you would need to meet for making a loan and IHT consequences for a release of this loan.
In the last 20 years, the average cost of a home in the UK has increased by £157,381 (average house price according to Landregistry.data.gov.uk) and with increasing inflation, it is not surprising it is increasingly common for parents to help their children get onto the property ladder.
If are giving financial assistance to your children or have received this from your parents it is essential to have something in writing signed by the receiver confirming how much has been loaned, the date of repayment and any other terms that have been agreed (such as interest or lack of).
It is common that these kinds of loans to children from their parents are created with the intention of later releasing the loan. For example, if the child is financially mature or the parents have saved enough money for their retirement and no longer require it to be paid back. At this point of release, financial assistance becomes a gift.
It is very important to know, HMRC will accept the release of a loan, but only if the release is by deed. A valid deed must be intended to be a deed by the parties and must be validly executed.
HMRC’s Inheritance Tax Manual states:
“Letters and circumstantial evidence that clearly indicates an intention to absolve the beneficiary of the loan from any liability to repay will not be sufficient to discharge the debt.”
You can read the Inheritance Tax Manual on “Waiver of loans by deed” here.
If you are a parent lending money to your child, ensure there is a signed written acknowledgment.
If you release a loan and therefore release your child from this debt as an intended gift for Inheritance Tax Planning, ensure this release is by a valid deed.