Who physically pays the IHT following a large loan?

doodling

Hi,

There are several points here and Ill attempt to summarise:

1. Loans are loans and gifts are gifts, they are different things.  It would be helpful if all parties to the transfer of money have documentary evidence of what it was and, if it was a loan, what the terms were.

2. If it was a loan to support buying a house with a mortgage then it is very likely that the recipient has a documentation signed by the father saying it was a gift.

3. In general, gifts are treated as being an asset of the estate for 7 years (there are some small exceptions) for inheritance  tax purposes only, they are not however an asset of the estate for any other purpose.

4. Loans an asset of the estate for all purposes, including inheritance tax.

5. Loans can be a nightmare on death.  Unless there is a clause in the loan agreement that requires repayment on the lenders death then the loan can persist, potentially for a long time, after the death meaning that the estate cannot be finalised - the executors will hate this (or if they are professional executors will love how much they can charge you to deal with it!).

6. If the borrower is also a beneficiary of the will then it is usual to use the bequest to offset the value of the loan, obviously, whether that is possible depends on the relative values of the two sums.  Note that depending on the terms of the loan and the will, the borrower could potentially (attempt to) insist that this doesn't happen and the loan continues on its original terms.

7. If there is documentation that this was a gift then the only way to handle this if there needs to be fairness across several beneficiaries is for the father to keep updating his will so that the distribution  of assets reflects the outstanding amount of the "loan".