Inheritance tax on charge on property

custardcream

Wondering if someone could point me in the right direction. 

I’m in the process of buying a house using a gifted deposit from my mum (who is thankfully alive and kicking). A legal charge is being put in place as part of purchase agreement for full repayment of sum. The plan is to remortgage in a couple of years with my mum being repaid at that point. 

What can be put in place now to ‘make things easier’ in the event of her passing before the debt is repaid and where will I stand in terms of repaying inheritance tax? I have 2 siblings and my understanding is my mum’s estate will be split 3 ways. We have a very good relationship but I need to think worse case scenario and plan accordingly. 

Advice would be very much appreciated! 

springmagpie

The deposit isn't "gifted" it is a loan and will be seen as such 

custardcream

Thanks. I fully understand it’s a loan, (that was just terminology mortgage company used).

I still don’t know where I stand or what to do for the best outcome? 

Keep_pedalling

This is a loan not a gift, so it remains within her estate indefinitely. The question of IHT depends entirely on the value of her estate at the time of her death. If she is a home owner and the home is worth at least £175k then the estate (including you loan) would need to be more than £500k before IHT became an issue and if she is a widow then it could be up to double that.

You say this is for a deposit which indicates you will still need a mortgage and you are going to struggle to get one if this is not an outright gift. 

p00hsticks

custardcream said:

Thanks. I fully understand it’s a loan, (that was just terminology mortgage company used).

That would suggest that the mortgage company believe that your mother is giving you the money without any strings attached or expectation of repayment.

 If it is a loan and the intention is to put second charge put on the house over and above any mortgage to repay it then you need to be open about it with any mortgage company - many won't lend in those circumstances.

custardcream

Mortgage all agreed. Solicitors all primed. Everyone knows everything. Charge on property not in question. Apologies for misleading terminology. 

I know it would be seen as her estate and it would be liable for IHT.  My question is where I would stand in terms of them reclaiming their dues should the worst happen. 

Keep_pedalling

custardcream said:

Mortgage all agreed. Solicitors all primed. Charge on property not in question. Apologies for misleading terminology. I know it would be seen as her estate and it would be liable for IHT.  

My question is where I would stand in terms of them reclaiming their dues should the worst happen. 

That depends on your mother’s other assets and the size of the loan. How much is she lending you? What is the value of the rest of her estate? What is her marital status? 

If the loan is relatively small compared with her total assets then it should be a relatively simple matter of adjusting the amount you receive from the net value of the estate to take into account the amount of the loan.


For example if her total assets after funeral costs and IHT was £600k and £100k of that was your loan then you get £100k of the other assets and your siblings get £200k each. It gets a bit more complicated if your loan exceeds 1/3 of the value of the estate as you will then need to repay some of it to the estate to enable your siblings to get their share. 

Hoenir

custardcream said:

Mortgage all agreed. Solicitors all primed. Everyone knows everything. Charge on property not in question. Apologies for misleading terminology. 

Has the mortgage company agreed to there being a second charge on the property ?  From the mortgage company's perspective a gift is made without reservation. A loan is something totally different. Terminology cannot be twisted to serve a purpose. 

poseidon1

custardcream said:

Mortgage all agreed. Solicitors all primed. Everyone knows everything. Charge on property not in question. Apologies for misleading terminology. 

I know it would be seen as her estate and it would be liable for IHT.  My question is where I would stand in terms of them reclaiming their dues should the worst happen. 

I think you  are asking if ( worse case scenario) siblings could force a sale to get their share of the loan after mum's death.

As pointed out elsewhere, if your mother's estate is large enough that loan can be 'repaid' against your defacto share of your mother's assets, leaving your property free of the 2nd charge, but a smaller distribution from your mum's remaining estate.

The risk factor for you is if mum's personal estate is in future eroded away by care home fees, leaving little else other than the loan to you. That is something you would need to keep a close eye on. You might want to consider  taking out term assurance on your mother's life in trust for yourself, to provide a cash sum to pay off her loan, so you don't have to worry about this scenario. 

Best thing to have in mind  is that sooner or later you have to pay back the loan so ensure one way or another you have the resources to do so. Relying on your mother's estate being large enough to facilitate this, might not be the best plan.

Marcon

custardcream said:

Mortgage all agreed. Solicitors all primed. Everyone knows everything. Charge on property not in question. Apologies for misleading terminology. 

I know it would be seen as her estate and it would be liable for IHT.  My question is where I would stand in terms of them reclaiming their dues should the worst happen. 

If this loan has been properly documented, there should be a clause covering such an eventuality. Is there? That will tell you what will happen - nobody here can guess what it says.

However...in the absence of any such clause:

• your mother's executors would need to gather in all her assets/pay any debts she has at the time of death
• if the loan she has made to you is greater than your 1/3rd share of the estate, it will be for you and your siblings to agree how to deal with things.

If solicitors are all primed and everyone knows everything, mightn't it be better to talk to those who are fully informed, rather than relying on answers given on a public forum where nobody knows anything beyond the few few sentences you've given?