Loan taken out for someone else

kitkat68

Hi there 
a family member who cannot get any type of credit has has their parents to take a loan out for them.
this has been completed and the funds have been transferred from the parents account into their bank account.

They are making monthly
payments to their parents which cover the costs…I guess it’s seen as a local arrangement?!

the questions I have are : 

1. How is this local arrangement viewed by HMRC? If the parents pass away ( they are over 75), would it be included and treated like a gift? It is over £20k so exceeds the gift allowance?

2. how would their estate treat this if the parents pass away whilst it’s still being repaid - it’s a 5 year loan? 

3. How does someone of this age drawing their pensions qualify for
a loan of this size?

thanks

Emmia

I'm not sure how the arrangement is any of your business?

3. Just because someone is on a pension, doesn't exclude them from borrowing via loans or having a credit card - a pension is ultimately income, which loan providers / credit card companies will assess to determine whether the borrower will pay it back.

Many pensioners have a good level of income, especially if they have saved well / contributed to a pension throughout their working life... plus they may also have lower outgoings having paid off their mortgage.

*If the family member stops paying, the parents are still liable for the loan they've taken out.

Sarahspangles

1. What HMRC will know about this arrangement depends on what the executors tell them when they apply for probate. There’s a common misconception that older people aren’t ‘allowed’ to gift money but HMRC aren’t interested about gifts unless the total estate value is large enough for IHT to be payable, had the gifts not been made. It’s why gifts have to be declared in the application for probate.

If the estate does fall into IHT values and this transaction is treated as a loan with a sum outstanding then that is an asset of the estate and increases the amount on which IHT is due. If it is treated as a gift the excess over the gift allowance would get added back into the estate value for IHT purposes, as if it is still an asset of the estate. So either way the estate would need to pay IHT on it.

2. If the loan isn’t fully repaid by the parents to the lender when they pass away then the balance will be a liability (debt) offset against the estate value.

How the loan to the family member is treated, if it isn’t fully repaid by that person, will depend on how the parents have formalised that loan. If there is a loan agreement then the family member would owe the balance to the estate, i.e. it’s a loan not a gift. It could then be netted off their inheritance, for example.

If the loan is an informal agreement then it’s more difficult. To end up being treated as a gift, the family member would need to claim it wasn’t a loan or that there was some agreement where any balance outstanding on the parents’ deaths became a gift.

As you seem to know quite a lot about this arrangement it sounds as if you’re family, it may be worth asking if it’s been formalised. One scenario for the parents to consider while they’re still alive is that the family member could be asked to repay the loan to pay for care fees - or if the plan is to say it was a gift, they could still be asked to repay it if was made with the intention of reducing assets. 

Keep_pedalling

1. HMRC would not take any interest in such a loan arrangement, it is not a gift and even if was there is no such thing a gift allowance. Everyone has an annual IHT exemption of £3000 but there is no limit on how much anyone can gift. If IHT was actually a consideration the parent would not need to take out a loan to help their child out the could do i5 from their own assets.

2. Any unpaid part of the loan to the child would treated as a debt owed to the estate and the outstanding amount owed to the bank would be a debt owned by the estate. In effect the two cancel each other out as far as estate value is concerned.

3. Presumably they met the lenders criteria age and being a pensioner have nothing to do with it.

PixelPound

Wonder if the OP's interest is due to any affect on the portion they get of any will if the estate pays off the remainder of the loan?

It depends on the will and the executor. What proof do you have that the parents gave the money to the child? An executor could take the amount to clear the loan from the portion due to the child. Though the child could dispute this and you both end up having to pay legal fees if the instance that each of you is right.

Otherwise it's the parents that are liable for the loan, whether the child pays them back or not is between the child and their parents.

kitkat68

Thanks for the replies. I have POA for the parents and just wondered how it was viewed….they can do what they like I’m not bothered as I’m not a beneficiary, they didn’t want to have their child (in their 40s) to have POA.