Inheritance Tax & Family Loans

supermonkey

Hi all,

Now I know that I can't give large sums away to a family member, but what about interest free loans?

Would this be exempt from tax?

Giving someone an interest free loan of say 30k instead of them getting a loan elsewhere could save them thousands - better than a gift would be anyway!


Thanks

CLAPTON

you can give large sums of money to family members or indeed anyone else... neither parties would pay any tax

if however, your estate is over the inheritance tax limit and you were to die within 7 years there may be an IHT liability

supermonkey

Thanks - yes i know a gift would be subject to IHT, but what about an interest free loan. I presume this would be ok?

CLAPTON

a loan would to include as part of the estate and so would be subject to IHT ... exactly as for a gift except a gift is exempt after 7 years while a loan will tbe charged IHT forever.

Of course if you don't make the gift the the money will still be part of your estate and so be subject to IHT anyway.

what exactly is the problem?

the-chauffeur_2

Interest free loans - or any type property 'lent' to others - are treated as gifts with reservation for tax purposes. Effectively they remain within the donor's estate whilst the donor maintains an interest in them.

Another example (read popular wheeze folks think will reduce their IHT liability) is when a parent 'gifts' his house to his son and daughter, who in turn let the parent use the property at no cost. The theory on the part of the donor is that he's passed the property out of his estate, and so it shouldn't be liable to IHT. Unfortunately, the Revenue are already several steps ahead, and because the donor is gaining benefit from the property (in that he doesn't pay rent at market rates) his 'gift' remains part of his estate.

For the purposes of the donor's estate, put simply a gift is exactly that - the donor can have no control over any part of the money/property once it has been gifted. You can 'give' as much as you like to your estate during your lifetime - the limiting factor is the length of time that elapses between the gift and the death of the donor. If the donor survives for seven years after the gift, there is no IHT liability.

Sounds like your best bet would be to have a word with an accountant and/or tax and trust specialist.

supermonkey

thanks for your replies... i think i've been getting myself confused...

i understand that the loan would be part of the estate...it would still be my money.

what i'm getting at is the regulation on how much you can give away in one year.. (6k?) if it's loan can it be as much as i want without any implications

CLAPTON

there's always implications but

I'm assuming that your estate is worth more than 312,000 or 624,000 if married.

Otherwise there is no point worrying about IHT

Also I am assuming you are quite old or in poor health and so might die within 7 years

And even the prospect of a conservative government raising the IHT limit to £1million or 2 M if married doesn't put your mind at rest.


Ok if the above is your situation

Then

a, if do do nothing your estate will pay IHT

b. if you lend money then, as that's still yours, your estate will pay the same as in (a) above.

c. If you give money away and live for seven years then your estate may well pay IHT but less than in either a or b above as the gifts over 7 years aren't counted

d. you can however give £3,000 away each year in any event without any IHT consequences

e. if your income is in excess of your needs you can give the excess away as you are allowed to make regular gifts from income (best to keep some sort of records here).

in none of the above is there any income tax to pay.

jimmo

Sorry if I’m butting in but Clapton is absolutely right. Just to elaborate a little:
If you grant someone an interest free loan and the borrower does not repay you before you die then the borrower’s debt to you will still exist and form part of your estate for IHT purposes.
So, the granting of an interest free loan has no effect for IHT purposes.
For Income Tax purposes, if you grant someone an interest free loan, you are not entitled to any interest on the loan. I suppose that in practical terms you could say that by giving a family member an interest free loan you are forgoing your opportunity to keep your money on deposit earning interest but, on the face of it, there’s nothing particularly wrong with that.
If the person you lend the money to uses your interest free loan to, say, pay off his mortgage then he may be saving himself quite a bit in interest charges and there’s nothing particularly wrong with that.
When you come to Capital Gains Tax (which is my claimed specialism) there is a general rule that transactions made at other than market value will have the market value rule imposed. There is no such corresponding rule for Income Tax. The taxman cannot charge you income tax on the interest you would have received if your money had been kept on deposit.
However that is the viewpoint of an ordinary, everyday taxman but there is another tier of HMRC which looks to challenge arrangements which are made with no commercial purpose and whose sole intention is the avoidance of tax.
As a purely personal opinion there is a fine line between normal parental concern for your children and trying to help them and deliberate planning to artificially reduce your tax liability.
If you are talking about interest free loans to your children in 4 figures I would think that reasonable. 5 figures, well OK, 6 figures a bit iffy, but what else is likely to come out of the woodwork, 7 figures what the hell are you doing on this forum?

EmeraldIsle_2

Sorry I am new to this forum thing so don't know how to post a new thread but inline with the current thread discussion so am posting it as a 'reply'.
Anyway, I wondered if anyone knows the answer to this query.
If a relative who lives in the Channel Islands wants to give a 'loan' which just over the £250k mark to someone who is resident in the UK, is the recipient of the loan liable to IHT or CGT (either way if the donor does or does not die within 7 yrs following the loan) and does it depend on what the loan is used for (I know there are conditions around gifts with reservation etc)?

CLAPTON

EmeraldIsle wrote: »

Sorry I am new to this forum thing so don't know how to post a new thread but inline with the current thread discussion so am posting it as a 'reply'.
Anyway, I wondered if anyone knows the answer to this query.
If a relative who lives in the Channel Islands wants to give a 'loan' which just over the £250k mark to someone who is resident in the UK, is the recipient of the loan liable to IHT or CGT (either way if the donor does or does not die within 7 yrs following the loan) and does it depend on what the loan is used for (I know there are conditions around gifts with reservation etc)?

at the bottom on the left is the 'new thread ' button

slopemaster

CLAPTON wrote: »

at the bottom on the left is the 'new thread ' button

It's only there when you're logged in though