Tax implications of paying off sister mortgage

Kim_13

Keep_pedalling said:

Kim_13 said:

Will your sister be repaying you? Making it a loan would mean no risk of IHT, and as a gift you could charge no interest (meaning no tax for you to pay.)

Why do you think this is a risk? If it is a gift then it falls out of the OPs estate after 7 years, if it is a loan it will never fall out of their estate.

Gifting NEVER has a negative impact on your IHT liability.

If the loan was defaulted on the estate would have reduced in value. On reflection though, a valuation would probably expect all reasonable collection efforts to have taken place.

I didn’t think of the 7 year rule in that way - it won’t be a negative effect, but it might be a positive one (tax drops by 8 percentage points after 3 of the 7 years, and 8 percentage points per year thereafter.)

Albermarle

I didn’t think of the 7 year rule in that way - it won’t be a negative effect, but it might be a positive one (tax drops by 8 percentage points after 3 of the 7 years, and 8 percentage points per year thereafter.)

Tapering only is relevant where there are very large gifts ( as explained above). It is a much misunderstood rule.

In practice for most gifts ( < £325K) the donor has to live 7 years, or 100% is counted back into the estate.

masonic

Kim_13 said:

Keep_pedalling said:

Kim_13 said:

Will your sister be repaying you? Making it a loan would mean no risk of IHT, and as a gift you could charge no interest (meaning no tax for you to pay.)

Why do you think this is a risk? If it is a gift then it falls out of the OPs estate after 7 years, if it is a loan it will never fall out of their estate.

Gifting NEVER has a negative impact on your IHT liability.

If the loan was defaulted on the estate would have reduced in value. On reflection though, a valuation would probably expect all reasonable collection efforts to have taken place.

Supposing the OP "lends" the sister the £100k as an interest free loan repayable to the estate upon the OP's death. Then if the sister was one of the heirs to the estate, the executors would likely set it off against the money the sister would inherit and it would be valued at full face value. 

Most likely provision would be made in the will for at least that much money to be inherited by the sister. However, if the sister's share of the estate was insufficient to cover the loan that was still part of the estate, then executors and other heirs would be placed in a very difficult situation: either take enforcement action, or let the sister come away with a greater share of the estate than the deceased wished. If enforcement action is taken, then the costs probably could be deducted from the value of the estate. But that is just reducing the value of the estate by throwing away money. The same end result could be achieved by the OP transferring say £95k to the sister as a gift, and then withdrawing the other £5k in cash and setting fire to it.

poseidon1

fazrewards said:

Bigwheels1111 said:

fazrewards said:

Thanks all there will be no requirement to repay. Just my follow up question is, do I have to transfer the money to her bank account or can I directly contact Santander to pay it of for her?

Go the old fashioned way, a cheque.

To save any issues, my Dad did this every January.

Same surname, If questioned was easy to say a gift from my dad.

3K per year. Not tax issues.

Santander will not like a large payment in and out in a short period of time.

Even if called and told what is going on, Her account will or may be locked and you will have another post on here

going what can she do.

The answer is nothing.

She can take the cheque in her name into a branch, state I want this paid off the capital for eg.

Good suggestion, did not think about cheque. Only concern is if it will be a issue with £100k

Just a practical point, check whether your sister's mortgage is still within a fixed term penalty period. It would be a shame if your generous gesture were to be impacted by the bank applying early mortgage redemption penalties and your sister loses the full benefit of your £100k gift.

Also depending on your own age, you could consider taking out a cheap 7 year reducing term insurance policy to protect the gift from potential IHT if you fail to survive the 7 year potentially exempt transfer period.

BooJewels

As £100k is a pretty decent sum of money - could it be done more efficiently by not paying it off totally, but using the principle to generate income to cover - or partially cover - or overpay - her monthly payments. 

Depending on the current terms of her mortgage - interest rate, early repayment charges, term remaining and how much is allowed as over-payments etc., might it be better use of the money to gain interest on it and use that to mitigate the monthly cost to her.  £100k @ 5% is £416.66 per month - that might cover a decent amount of the monthly repayments.  Might be worth crunching some numbers to see what is most efficient.