Debt to the estate

Troubledfriend

A family member died and going through the papers looking for a will (none found ) we discovered a lot of money had been lent to a friend, small amounts over many years. No formal agreement found but recorded by the deceased as loans in notes on a writing pad and on pc. Small amounts had been repaid but a lot still outstanding. Do we record this on the probate form as debt owed to the estate? We think it will be extremely difficult to recover, even if we could prove it was a loan the person receiving the money has no assets to repay it. 

Marcon

Troubledfriend said:

A family member died and going through the papers looking for a will (none found ) we discovered a lot of money had been lent to a friend, small amounts over many years. No formal agreement found but recorded by the deceased as loans in notes on a writing pad and on pc. Small amounts had been repaid but a lot still outstanding. Do we record this on the probate form as debt owed to the estate? We think it will be extremely difficult to recover, even if we could prove it was a loan the person receiving the money has no assets to repay it. 

Pragmatism is sometimes a very good idea....what's the IHT position on the estate without the debt(s) being repaid, and the position if they are repaid? What do the beneficiaries think about writing off the debts, particularly as many of them are likely to be time barred (in broad terms, this is likely to be any loans made six years or more ago) even if the personal representatives did try to recover them for the estate?

Olinda99

If they are not loans and debts than they will be gifts and as such any gifts within the last seven years of death will reduce your inheritance tax allowance band

GDB2222

Olinda99 said:

If they are not loans and debts than they will be gifts and as such any gifts within the last seven years of death will reduce your inheritance tax allowance band

It’s clear from the op that these were loans, not gifts. Financially unwise loans, perhaps, but that doesn’t change their nature.  

The op was asking what value to place on them, ie the nominal value, or the real, recoverable value. I’d have thought the latter, but I am not an expert. 

Keep_pedalling

Olinda99 said:

If they are not loans and debts than they will be gifts and as such any gifts within the last seven years of death will reduce your inheritance tax allowance band

Depends if the gifts exceeded to annual £3k allowance or not. However these are loans not gifts so will have to be declared on the IHT return (using IHT 416) if an IHT return is required. 

GDB2222

Keep_pedalling said:

Olinda99 said:

If they are not loans and debts than they will be gifts and as such any gifts within the last seven years of death will reduce your inheritance tax allowance band

Depends if the gifts exceeded to annual £3k allowance or not. However these are loans not gifts so will have to be declared on the IHT return (using IHT 416) if an IHT return is required. 

Out of interest, if the executors assess the value as £nil, why would they need to declare the loans?

Keep_pedalling

GDB2222 said:

Keep_pedalling said:

Olinda99 said:

If they are not loans and debts than they will be gifts and as such any gifts within the last seven years of death will reduce your inheritance tax allowance band

Depends if the gifts exceeded to annual £3k allowance or not. However these are loans not gifts so will have to be declared on the IHT return (using IHT 416) if an IHT return is required. 

Out of interest, if the executors assess the value as £nil, why would they need to declare the loans?

IHT416 says you have to assume it is recoverable, and add a note explaining why it is bad debt on IHT 400. 

Having said that this is only going to be important if the estate is in IHT territory. 

sheenas

It does seem that some discussion is required to resolve the issue. The notebooks don't form a contract, so in terms of being able to recover them.

Troubledfriend

Thank you for your comments , it’s helpful to hear others thoughts in these matters. Had forgotten about the six year rule on receiving the loan, this will also change the position regarding inheritance tax, as originally thought the estate would be above this limit if loan included but maybe not now.

Olinda99

GDB2222 said:

Olinda99 said:

If they are not loans and debts than they will be gifts and as such any gifts within the last seven years of death will reduce your inheritance tax allowance band

It’s clear from the op that these were loans, not gifts. Financially unwise loans, perhaps, but that doesn’t change their nature.  

The op was asking what value to place on them, ie the nominal value, or the real, recoverable value. I’d have thought the latter, but I am not an expert. 

surely if the 'loans' are not paid back then they are gifts?

otherwise I could 'lend' 500k to my son, record it as a 'loan' in an ecercise book and after death it would not be counted for IHT if not paid back to the estate

In my view the sums listed as loans in the exercise book if not rrpaid would be regarded as potentially exempt transfers

Keep_pedalling

Olinda99 said:

GDB2222 said:

Olinda99 said:

If they are not loans and debts than they will be gifts and as such any gifts within the last seven years of death will reduce your inheritance tax allowance band

It’s clear from the op that these were loans, not gifts. Financially unwise loans, perhaps, but that doesn’t change their nature.  

The op was asking what value to place on them, ie the nominal value, or the real, recoverable value. I’d have thought the latter, but I am not an expert. 

surely if the 'loans' are not paid back then they are gifts?

otherwise I could 'lend' 500k to my son, record it as a 'loan' in an ecercise book and after death it would not be counted for IHT if not paid back to the estate

In my view the sums listed as loans in the exercise book if not rrpaid would be regarded as potentially exempt transfers

By that logic if I borrow money from Lloyds bank but can’t pay it back it is a gift from the bank. 

If you loan your son £50k and your executor wants  to claim that it is bad debt, HMRC are going to want proof it is not repayable, and you are not going to be able to leave him anything in your will as his debt would simply be deducted from his inheritance, and IHT on the loan would still be payable. 

In this case we seem to have loans to a friend who is presumably not a beneficiary of the will.