Who physically pays the IHT following a large loan?

HappyHarry

Keep_pedalling said:

HappyHarry said:

Well, the child will owe the estate £100k, and the £100k is still part of FIL's estate.

Sorry but that is rubbish, a gift is absolute so nothing is owed to the estate.

The gift just eats up some of FILs nil rate band and if that means IHT is due then it is payed by the estate. 

But the OP said it was a loan ... 😉

QrizB

tobybarker said:
So, the child, whether it was a loan or a gift, never gets the tax bill? How does that square with the quote I found earlier (in italics)? Thank you for your help and patience!

The recipient of a gift (not a loan) might have to pay the IHT if there isn't enough money left in the estate to pay it. This is to stop anyone from avoiding IHT by giving everything away on their death bed.

See "Recipients and Their Potential Liability" on this web page for a discussion of this:

https://www.haggards.co.uk/news/who-pays-inheritance-tax-on-gifts/

Where it says:

In cases where the donor’s estate is insufficient to cover the inheritance tax, the recipient may be required to use their own resources to settle the outstanding amount.

Again, this is not applicable to a loan.

bobster2

@tobybarker maybe you could change the thread title to "large loan" not "large gift" to avoid confusion.

RAS

bobster2 said:

@tobybarker maybe you could change the thread title to "large loan" not "large gift" to avoid confusion.

The OP does not yet have enough posts to be allowed to edit.

RAS

Since this is a loan, a lot depends on the repayment conditions attached to the loan. That'll determine the value of the debt to the estate.

The other factor is whether IHT is even payable on the estate? The allowance can be anything from £325k to £1m, depending mainly on the deceased's marital status and the value of any property.

But the value of the estate includes outstanding debts. The executors pay any IHT.

Then they split the estate as instructed by the will. They reduce the amount the debtor receives to take into account the sum still owed. If the value of the debtor's share is less then they owe, then the estate can call in the difference.

Nothing to do with IHT.  

tobybarker

So, to summarise, the estate always pays the tax (if it has the funds, which in this case it almost certainly will), regardless of whether its a loan or a gift?

If this is true, why differentiate? I must need to sit in a dark room and think about what you've all kindly said above....

user1977

tobybarker said:

chatgpt informs me that if its a loan as such, the estate is liable for the tax; if its a gift, then the recipient pays up. In a nutshell, that's it?

Why are you asking ChatGPT rather than the actual humans here who know what they're talking about?

silvercar

Sounds like for mortgage purposes it was a gift, for balancing inheritance between siblings it was a loan. 

Either way there is the expectation that other siblings benefit from the estate in a way that takes into account the loan/ gift already received. 

If the donor had survived 7 years after making the gift, the gift would be out of the estate and the other siblings would benefit by the estate having a lower IHT bill.
If it was a loan that had been fully repaid, the estate would be unaffected.
Given the other siblings have no loss by this loan/gift being made, the estate should swallow the cost of the IHT before dividing up the estate ie the siblings all benefit equally from the net estate after IHT is paid (allowing for any outstanding loan).

silvercar

tobybarker said:

So, to summarise, the estate always pays the tax (if it has the funds, which in this case it almost certainly will), regardless of whether its a loan or a gift?

If this is true, why differentiate? I must need to sit in a dark room and think about what you've all kindly said above....

Presumably, the will made allowance for the fact one sibling had already received a loan/ gift. 

QrizB

From the OP, it sounds as though the donor/lender - the FIL - is still alive, so this might all be moot anyway depending on how long the recipient takes to repay the loan.