Inheritance tax - parents offsetting my mortgage

System

Nicholas-bloody-Parsons wrote: »

I agree with Clapton. You cannot be taxed on interest which has not been paid. The 3% saving is notional and not actual.

You could ask the bank for an R85 certificate of interest to clarify what interest has been paid or "saved".

Yes I suppose it's like my parents pulling 100k out of the bank and stuffing it under the mattress. In this way they have sacrificed any growth of that particular portion of capital, but are not actually using it to live as are still surviving on income. However HMRC aren't really going to be looking at what they could have done with the money, it's not really their concern.

Alternatively as I said on the tax forum I linked earlier, if my parents actually gifted me 100k, it would then be up to me what i did with the money, e.g bought a property, invested it or offset/paid off my own mortgage. Either way the only IHT I would be liable for would be the original 100k regardless of if I grew the money or saved interest on my mortgage. The same must therefore be applied in my case, the only difference is that they have not gifted me the money, it's just in a very poor savings account from HMRCs point of view. Lets be honest though a lot of savings accounts pay just above zero pc anyway!

One financial website even suggests parents gifting chunks of capital to invest and grow, as the growth will be outside of the parents estate and therefore not taxable (for IHT anyway), e.g gift 100k, place on the stock market and its grows to 200k. If this was still in the parents estate, the IHT would be 80k. However as 100k was gifted originally, the IHT would be 40k only. This therefore means that HMRC are only concerned at what parents physically give out of their capital and have no concern for what happens to that money after (that is the idea of a gift I suppose), so my scenario cannot possibly be liable for IHT as they aren't gifting me anything from their capital.

I suppose my parents could give me 100k, I could put this in my own offset account for a few years and then give them the 100k back. In HMRCs eyes It was an interest free loan which i have paid back in full. I suppose this is almost identical to my situation.

So after all of that I have answered my own question with your help. Thanks to all.

System

Just a further update in case anyone else is in this situation.

My parents went to see a tax advisor and brought up this subject. The advisor said that there IS potentially an IHT charge on the 'foregone interest' associated with offsetting my mortgage.

As he said it, this situation is like them lending me an interest free loan repayable on demand (this was mentioned by an earlier poster).

HMRC do treat the 'foregone interest' as a gift:
http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM14317.htm

He said the only way around this is to set up a trust (i.e. so money can grow outside the estate).

However he did say that so long as my parents have sufficient income, the 'interest foregone' would be a gift out of income and hence not subject to IHT.

If the interest forgone was subject to to IHT, apparently the rate would be accoding to HMRCs beneficial loan rate - currently 4% (which is greater than my mortgage rate):
http://www.hmrc.gov.uk/rates/interest-beneficial.htm