Loans and Inheritance Tax

s4nup

3 years ago, my wife and i were purchasing a house. Long story short, a few days before exchange the bank upped the deposit amount by £10,000. As this was money we just didn't have access to, we turned to my wifes uncle, who offered to lend us the £10,000, interest free, but was to be paid back in 5 years time. He wrote a record of this in a book.

Last year, he sadly passed away, and although we had 70% of the money, we didn't have the full amount (and we still had around 15 months left on the "term". We now have the full amount in a savings account.

A few weeks ago, solicitors from his estate have been in contact, (seems they have the book with the record of the loan) firstly clarifying the situation (in the letter, they stated that "we understand that you have paid back the money, we would like a little bit more information on this so we can close our records" and additional contact details for other people in the book that owed money (other family members). Trying to be honest, we responded that we had NOT paid back the loan, but that it was ready for payback and for them to provide details on how we could do this. We waited a few weeks and only yesterday, the solicitors responded that the money needed to be repaid IMMEDIATELY and was also subject to 40% inheritance tax.

Is this right? surely if its a loan that being paid back, then we shouldn't need to pay inheritance tax.

Hope someone can advise / comment.

Thanks

jennifernil

I think you should phone them for clarification.

dzug1

Sounds puzzling.

The amount of the loan may well be liable for IHT as it was an asset of the estate at the time of death. But not at 40% as there is a threshold for IHT a proportion of which will be allowable on the loan.

But that doesn't explain why YOU, who are repaying the loan, should be asked to pay it, rather than the estate or actual beneficiaries.

Definitely seek clarification.

s4nup

thanks guys...i guess i need to get the clarification...Just the shock of the letter demanding full payment + Inheritance Tax.

I'll get in touch with them and advise on the forum.

Thanks again

xylophone

It is the duty of the executors to collect any monies due to the Estate. What is due to the estate in this case is the £10000.
If IHT is payable then the executors pay it from the assets in the estate - I cannot see how you are liable to pay it? Could there possibly be some confusion with the PET rules? See http://www.hmrc.gov.uk/inheritancetax/pass-money-property/exempt-gifts.htm#3 - paragraph on seven year rule.

http://www.direct.gov.uk/en/Governmentcitizensandrights/Death/BenefitsAndMoney/DG_10029657
See "Money you may be able to collect" - there are some unworthy souls who might be looking at the sentence beginning "However any informal loans...";)

s4nup

xylophone wrote: »

It is the duty of the executors to collect any monies due to the Estate. What is due to the estate in this case is the £10000.
If IHT is payable then the executors pay it from the assets in the estate - I cannot see how you are liable to pay it? Could there possibly be some confusion with the PET rules? See - paragraph on seven year rule.

See "Money you may be able to collect" - there are some unworthy souls who might be looking at the sentence beginning "However any informal loans...";)

Ha! Great stuff there...i will definately challenge it. I'll wait for the Mrs to get back and we'll discuss it.

About your bottom paragraph, yeh, there are people like that (i think hence we are being asked to provide contact people that have dissappeared with large amounts of lent money!)

I believe in karma, so the full amount will be paid back :A

John_Pierpoint

What does the will say about the beneficiaries?

Yes it does happen and HMRC will want their 40% from the estate on this marginal correction to the account probably already submitted by the solicitors.

https://forums.moneysavingexpert.com/discussion/comment/51298021#Comment_51298021

SeniorSam

It seems to have been overlooked that the loan was for a set period, which has not yet been reached.

s4nup can therefore reply that he will honour the loan to the estate when it is due and has no legal obligation to do so before the due date unless he wishes to. The request to repay the loan is just that - a request. The borrowers have no obligation to any inheritance tax, only the original loan without interest in 15 months time and the Executors may have to wait if the borrower chooses. Alternatively, an early payment may attract a reduction in the loan equal to interest that would be lost on the capital if paid earlier than agreed. Worth asking.

Sam

s4nup

thanks all!
Just a quick update (if your interested). My wife rang the solicitors and was apologised to, for the wording in the communication from them. It transpired that they needed to confirm whether the loan was outstanding or had been paid back (there was an assumption on their part that it had been paid back, but we advised that we had not paid it back (for reasons of Karma and honesty!)) they said they needed to account for it to work out the Inhertance Tax on it, and they weren't demanding the money there and then (contrary to the wording on the letter stating "we require this loan to be paid back in full immediately"!) and that it was up to the executor what to do with the outstanding debts (who is my wifes other uncle / brother of the deceased). Also transpires that my wife is a beneficiary of the will and is entitled to (wait for the irony) £10,000 once all tax has been paid and everything is sorted!

Thanks for the advice!

getmore4less

s4nup wrote: »

thanks all!
Just a quick update (if your interested). My wife rang the solicitors and was apologised to, for the wording in the communication from them. It transpired that they needed to confirm whether the loan was outstanding or had been paid back (there was an assumption on their part that it had been paid back, but we advised that we had not paid it back (for reasons of Karma and honesty!)) they said they needed to account for it to work out the Inhertance Tax on it, and they weren't demanding the money there and then (contrary to the wording on the letter stating "we require this loan to be paid back in full immediately"!) and that it was up to the executor what to do with the outstanding debts (who is my wifes other uncle / brother of the deceased). Also transpires that my wife is a beneficiary of the will and is entitled to (wait for the irony) £10,000 once all tax has been paid and everything is sorted!

Thanks for the advice!

In that case they could net the two off and problem solved.


Looks like the uncle though of this issue and probably planned to forget asking for the money back if he had survived.

John_Pierpoint

It is probably what Uncle intended BUT:

No they cannot the tax man wants 40% ???

This is the question that got Louise Botting (and my dead father) into trouble, when she advised judicious use of the shredder.

http://en.wikipedia.org/wiki/Louise_Botting

If the bequest is a specific 10,000 and the will says free of tax then that is what your wife will get but someone is paying that 4,000.

[Generally speaking if a will says "I leave 10,000 to my only niece" that is what is means "free of tax" BUT you can pull a trick like my grandmother and her solicitor, where you parcel out everything to family members but forget to mention the priority beneficiary namely HMRC - It can cause a lot of friction within a family, when the realisation dawned that there was not enough left to go round and some assets are more liquid than others.]