IHT liability on loans that aren't recoverable?

Somerset_Alan

Suppose I die, and my executor delves into my past transactions to discover gifts I made.

Suppose one of those past transactions was a non-commercial loan, e.g. to a family member.

Suppose the family member hasn't repaid the loan - despite reminders - and it looks unlikely that it can be recovered.

Would the amount of the loan be considered part of my estate for IHT purposes - either treated as though repaid, or treated as though it was a gift? Or is there some other way that the loan should be accounted for by my executor?

lincroft1710

Is this an actual scenario? How would the executor know for definite the loan hadn't been repaid and the you had spent the money. In any case you would be dead so why would you be worrying about what might happen after you've gone.

user1977

Is this an actual scenario? Or a cunning tax avoidance scheme you're cooking up?

I expect there are wider-ranging criteria which HMRC use to decide whether something is genuinely a "bad debt" which I guess may apply here.

Keep_pedalling

Have a look at form IHT416. Assuming an IHT return is required then the lone has to be declared on this form and you have to give the reason why the loan is not recoverable in full. Whether HMRC accept that the debt is unrecoverable is going to be down to the exact circumstances.

If for example the borrower had died with an insolvent estate then there will be no question that none of the loan is recoverable, but if it was just the case that the borrower had no liquid assets but owned their own house then I think HMRC would regard that as recoverable.

Somerset_Alan

https://forums.moneysavingexpert.com/discussion/comment/81919903#Comment_81919903

Thank you for your complete answer.

To other people asking whether this is real, and how would the executor know, etc:

It is real (apart from the fact that I haven't died, and hopefully won't die tomorrow). I keep proper records of gifts made, to make my executor's job easier. Some of those gifts are to family members. There are also various sums that have gone out of my bank account and into the account of some of the same family members as loans, and to avoid any doubt about the completeness of my record of gifts, I also include details of these loans in my record of gifts. It crossed my mind that HMRC might view those loans as part of some tax-avoidance scheme - which they are not. So I asked the question on here and I have my answer.

As an aside, I wonder whether anyone has any advice on the format and content of this sort of record? Or even a template?

Somerset_Alan

https://forums.moneysavingexpert.com/discussion/comment/81919023#Comment_81919023

I think that's the core of the problem - the executor won't have second sight, so I think I need some advice on how to document the loan (whether repaid or not) to ensure HMRC don't think it's a tax-avoidance scheme.

Keep_pedalling

When we have lent our children money we have produced a simple loan agreement and recorded the loan and amount repaid on the same spreadsheet we have recorded all our gifting on.