Personal loan made to now deceased - tax liability

mrmat

Hello there

I am posting on behalf of a family member who loaned money (personal loan) to another family member, who very sadly recently died. Whilst this has been a horrible time for me personally I am in the position of needing some financial advice - on behalf of the other two parties.

It may be best to seek professional advice, but at this stage just wanted to garner opinion on this matter.

The deceased left behind a partner (they did not marry), and two children with a house and mortgage.

The total loan which is technically repayable to my other family member by the deceased's partner is above 20k. I believe there is some written record of the loan, however I don't know if this makes it legally enforceable.

Let's say the creditor of this personal loan decides to gift the previously loaned money, such that the loan would not have to come out of the total estate. i.e. they get to keep the money rather than having to pay it back.

Would the creditor then have to pay tax on this distribution? Or does the tax get written off because the debtor is deceased?

The added dimension is that I believe the loan was from a family trust fund.

Any friendly help would be gratefully received at this point. And if you could put any answers in layman's terms...

Thanks,

M

CLAPTON

There is not enough detail here
but normally :

the debtor owes the creditor 20,000

the creditor is now the estate of the deceased

the debt will form part of the deceased estate and so in principle liable to IHT

if the beneficiary of the estate wishes to give 20,000 away then they can without tax liability on either side


However I have no idea about the family trust fund or the implications.

Is a solicitor dealing with the estate?
Is there a will?

jamesd

What the trustees of the family trust can do depends on the specifics of the trust. The person didn't lend the money, the trust did, and if they are a trustee they have to remember their legal duty to carry out the obligations of the trust. If they do not, the other beneficiaries of the trust will rightly be upset and may take action against them.

I expect that it'd be better to take the money back from the estate, if the estate has the money, then pay it out again to whoever they want to get the money.

Why is the loan technically repayable by the partner of the deceased? Was the partner a joint borrower with the deceased? Unless it was joint, with them actually having signed the loan agreement, then the partner has no legal liability at all for the loan. It'd be an obligation of the estate instead. The same applies to all other debts of the deceased, from mortgage to credit cards.

Be sure that you and all of those involved keep a very clear distinction between these legal entities, each of which has its own rights and obligations:

1. the estate (and any debts it's liable for).
2. the trust.
3. the trustees of the trust.
4. the executor(s) of any will, or whoever ends up as administrator.
5. the partner of the deceased. If there is no will, the partner would normally inherit nothing at all. But may end up with partial control of money held in trust for the children.
6. the children of the deceased (who are likely to be the only beneficiaries of the estate if there is no will, given the absence of a legal wife, assuming that partner is not a legal civil partner)
7. any insurance, which is almost certainly written in trust and would normally be distributed outside the estate according to an expression of wishes made by the deceased in writing to the insurers. And that expression of wishes may need to be replaced by insurer trustee judgment if it didn't take into account the children.
8. any pension, which is very likely to have death benefits available that will be treated just like insurance.

Each of these has very specific rights and obligations and it's essential not to forget any of them.

If there was a will that didn't include the children, the children might well need to take action to protect their rights and seek some of the estate for themselves.

The partner can't be assumed to never remarry, so providing them with money isn't as effective as providing money in trust to the children. Sad stories of neglected children of first relationships after a second relationship has started abound, and without a trust to protect them the children may end up losing much of their proper inheritance. For this reason, the executor or administrator of the estate, if the will permits it, is likely to be advised to do this sort of thing.

The trustees of the insurance and pension providers need to be informed of the existence of the children, in case they don't know, the nature and timings of all relationships involved and the contents and timing of writing of any will. While they are not bound by the will if it's sufficiently recent it might help them to decide what to do. Normally their first inclination absent other guidance with no expression of wishes would be to look after the children, which would be likely to mean money paid in trust for them.