Inheritance tax on parent’s loan?

CJSnet

Hi, my parents recently passed away and 3.5 years before their passing they gave me a loan of £150,000. I was repaying it monthly and had repaid about 10% of it. Let’s say £135,000 was left to repay. 

I have seen some mentions of a £325,000 allowance for family “gifts”. If that is relevant I am sure their other gifts to family including mine did not exceed £325k. 

The total estate value is about £2.5m and there are 3 beneficiaries (3 siblings). 

Qs:

1) Do I repay this loan to the estate?
2) I have 2 siblings. Can I just pay 2/3rds of it back to them and retain 1/3rd?
3) Will inheritance tax be due on the outstanding £135,000? How do I work that out?
4) If I pay the £135k back to the estate now, then would my siblings effectively have to pay inheritance tax on £135k more than they would have if I didn’t pay it back, because the estate bank account or pot would be £135k richer? 

Basically how do I work it all out? Thanks!

poppystar

Is there a Will? If so who is/are the executors? They will be responsible for dealing with the estate and calculating tax. 

The estate pays inheritance tax as a whole, not individual beneficiaries.

Keep_pedalling

The outstanding part of your loan is owed to the estate / estates and will be subject to IHT. You don’t need to pay it back, the executor of the estate just needs to adjust the distribution to you and your siblings to take account of it.

Your parents died close together, did the first to die leave everything to the survivor? Was your loan a joint one or from a single parent?

Don’t make the same mistake as your parents, with an estate that size they don’t seem to have done any estate planning (they really should have been gifting not lending), and the very large IHT bill is going to be much larger than it could have been with some simple IHT planning.

You and your siblings should seek professional advice about your own estates, now that you will all be coming in for a large inheritance.

doodling

Hi,

At a really simple level it will work something like this:

• Estate assets excluding loan £2500k (A) (I assume that this figure doesn't include the loan but that is just a guess, the loan is an asset of the estate also)
• Loan £135k (B)
• Total estate value £2635k (C)=(A)+(B)
• Inheritance tax threshold £325k (D)
• Estate subject to inheritance tax £2310k (E)=(C)-(D)
• Total inheritance tax due at 40% - £924k (F)=(E)x0.4
• Total estate value after inheritance tax - £1711k (G)=(C)-(F)
• Total due to each of three beneficiaries - £570k (H)=(G) / 3
• Total due to you after loan repaid - £435k. (J)=(H)-(B)

Given that it was your parents then the inheritance tax threshold (stated above as £325k) may be up to £1m depending on what happened on the first death and whether they owned their own home.  It is also possible that your parents had other assets with a more favourable inheritance tax treatment.  The above is just a (simplified!) example, the executor will need to work out the exact inheritance tax due according to the rules.

To answer your questions:

1. Whether you repay the loan now is between you and the executor.  What were the terms of the loan (was it repayable on death of the lender) - you may be under no obligation to repay.  [ETA - Just to be clear, I mean that you may be under no obligation to repay now, I don't mean the loan gets written off!] As there is probably money in excess of the loan value coming to you then it would make sense for the executor to just subtract the value of the loan from your part of the distribution.
2. That isn't recommended - the money from the estate to the beneficiaries should come from the executor so if you went down the path of repaying the loan then you would repay to the executor who would then distribute it to the beneficiaries.  Is there any reason you want to repay the loan rather than have it settled as part of the estate distribution?
3. The loan is an asset of the estate, inheritance tax will be due on the whole estate - see above for one way of doing the calculation.  It is not meaningful to calculate inheritance tax on the loan in isolation, the executor will be calculating the inheritance tax due and paying it, then distributing what is left to the beneficiaries, taking into account your loan if it still exists.  Neither you as someone who has a loan, or the beneficiaries, need to worry about the inheritance tax, the executor will sort it out and you get what is left.
4. The loan is an asset of the estate, whether you repay it or not has no impact on the amount of inheritance tax due.  As noted above, inheritance tax is calculated on the whole of the estate and reduces the beneficiaries shares equally.  You don't get any benefit or disbenefit compared to the other beneficiaries because you have a loan.

The only reason your loan might complicate things is if the money is needed to pay the inheritance tax because, for example, your siblings don't want to sell your parents' house - I'd only worry about that if the situation actually arises.

Hope the above helps.

CJSnet

Great advice, thanks @doodling et al. And to answer the question, the reason I'd want to repay my siblings early is because the house might take a long time to sell.

SeniorSam

In calculating Inheritance Taxes, remember that there is a Residential Allowance if a property is owned in addition to the Inheritance Tax allowance. A possibility of each person having a maximum of £1,000,000 with IHT and residential allowances.  Seek professional advice to ensure that the calculations are correct and the executors dont end up paying more than they should.

Keep_pedalling

CJSnet said:

Great advice, thanks @doodling et al. And to answer the question, the reason I'd want to repay my siblings early is because the house might take a long time to sell.

You may have missed this first time round but could you answer my previous questions , did the first to die leave everything to the survivor? Was your loan a joint one or from a single parent?

This is important as far as the point Sam has made about the RNRB. If the first to die left everything to the surviving spouse the spouse  would have an estate exceeding £2M which would reduce the exemption by £250k ( for every £2 over £2M reduces the RNRB by £1). A deed of variation might help here if the first death occurred within the last 2 years.

CJSnet

Keep_pedalling said:

CJSnet said:

Great advice, thanks @doodling et al. And to answer the question, the reason I'd want to repay my siblings early is because the house might take a long time to sell.

You may have missed this first time round but could you answer my previous questions , did the first to die leave everything to the survivor? Was your loan a joint one or from a single parent?

This is important as far as the point Sam has made about the RNRB. If the first to die left everything to the surviving spouse the spouse  would have an estate exceeding £2M which would reduce the exemption by £250k ( for every £2 over £2M reduces the RNRB by £1). A deed of variation might help here if the first death occurred within the last 2 years.

Answers:

1. Yes
2. Single 

One thing I realised is the mortgage brings the total estate down to below £2M.