Take the case of Astrid, a widow of 60, who was anxious to support her only son Peter when he was seriously considering the purchase of a flat of his own. Astrid was not without means and offered to lend her son £150,000 with no repayment terms and no security. Peter went ahead on the strength of this and bought himself a very nice apartment.
Several years later the unexpected happened. Some shares in a private limited company which Astrid’s late husband had bequeathed to her suddenly became very valuable following a takeover by a public limited company. Almost overnight her financial position was transformed. When Peter next came to see her she told her son that he could forget the loan - it was a gift. Mother and son suitably celebrated their good fortunes!
A few years later Astrid sadly passed away and a solicitor whom she had appointed as her executor took possession of all her papers, bank statements and records. During the course of his research he came across a cheque stub showing a payment of £150,000 to Peter with the words “flat loan” written underneath. The solicitor asked Peter if he would call in and after some prompting the whole story came out.
Of course the solicitor could not ignore the loan. He explained to Peter that an oral agreement to convert a loan to a gift would not stick in law. He explained further that even if Astrid had written a letter to Peter in which she absolved him from any obligation to repay the loan this would not be sufficient to discharge the debt. The release would only have been effective if it had been made by means of a formal deed. Such a document must:
- Make it clear that it is intended to be a deed by the parties to it, by describing itself as a deed or otherwise, and
- Be validly executed (usually by signature) by those persons.
The solicitor went on to say that HMRC are quite intransigent in their approach to these matters and have plenty of case law to support their stance. They say:
If any loan has been waived by the lender, so that the estate of the lender is reduced for Inheritance Tax purposes by the amount of the loan released, the waiver must be effected by deed.
The solicitor also explained that Astrid’s loan/gift would have to be included as an asset in her estate and this would increase the IHT charge by nearly £60,000. He also commented that if Astrid had left all of her estate to persons or entities other than to her son the situation could have been very serious for Peter.
It is critical that a loan waiver is made properly, even if the amount involved is only modest. If an arrangement is not concluded in a legally acceptable form the outcome could be expensive.
C&H Stedman are here to advise on loan waivers and other inheritance tax issues.