Loans to family,gifts from annual allowances, foregivness

oldwiring

A number of years ago we loaned informally amounts to two of our three children to buy for one a new kitchen, the other a car. Both loans have outstanding balances.

I'd like to know how forgiveness of all or part of those loans interacts with our annual allowances, should we desire, say, to give to all or any of our children.

SuperHan

For inheritance tax, you have a £3,000 annual allowance to make gifts with, which will roll forward from the previous year. To the extent the total gifts exceed £6,000 (assuming you have made no other gifts), there will be no immediate charge to inheritance tax, but the write offs will be considered a potentially exempt transfer (or PET).

If you die within 7 years of making the PET its value will be included in your estate when you die and subject to inheritance tax if your estate value exceeds the nil rate band of £325k per individual.

If you survive the PET by at least 3 years but not the whole 7, you will get a taper relief that means IHT won't be due at the full 40% rate on your death.

There shouldn't be any other tax implications/interactions with annual allowances etc.