The Bank of Mum and Dad

[funduffer]

Thank you for all your helpful responses to my original post, and thanks to Cliffedge for what I think is the most helpful (viewtopic.php?p=551718#p551718).

My thinking now is to wait until closer to September 2023 when my son's mortgage rate changes, and his, and his wife's, employment positions are clearer.

If he still needs a loan, I think I will lend him the money to pay off his mortgage, then he would pay it back, (probably) interest free over a period that enables him to maintain payments. I would also have first charge on the property, so that if the house is sold, or a further loan taken out on it, I would be repaid.

My will would also change so that any outstanding loan amount on my death is deducted from his inheritance. (I am expecting it not to be repaid fully when I check out!)

My daughter is happy with this approach.

I am assuming here that if I make the loan, and I live 7 years, and it is not fully repaid when I die, then there would be no IHT to pay. At 67 and in good health, I think this is a risk I am prepared to take.

FD

[staffordian]

I am assuming here that if I make the loan, and I live 7 years, and it is not fully repaid when I die, then there would be no IHT to pay. At 67 and in good health, I think this is a risk I am prepared to take.

I'm no expert, but doesn't the seven year rule just apply to gifts?

I'd assume (though it is only an assumption!) that contractual arrangements such as this loan are outside the scope of this rule, such that whether or not you survive the seven years, the same terms as you outline would apply.

[funduffer]

I am assuming here that if I make the loan, and I live 7 years, and it is not fully repaid when I die, then there would be no IHT to pay. At 67 and in good health, I think this is a risk I am prepared to take.

I'm no expert, but doesn't the seven year rule just apply to gifts?

I'd assume (though it is only an assumption!) that contractual arrangements such as this loan are outside the scope of this rule, such that whether or not you survive the seven years, the same terms as you outline would apply.

You are right, I just googled it. If it is a loan it would count as part of my estate for IHT purposes. If I were to waive the debt, it would become a gift, counting from the date I waive the debt.

Thanks for the comment.

FD

[terminal7]

I am assuming here that if I make the loan, and I live 7 years, and it is not fully repaid when I die, then there would be no IHT to pay. At 67 and in good health, I think this is a risk I am prepared to take.

I'm no expert, but doesn't the seven year rule just apply to gifts?

I'd assume (though it is only an assumption!) that contractual arrangements such as this loan are outside the scope of this rule, such that whether or not you survive the seven years, the same terms as you outline would apply.

You are right, I just googled it. If it is a loan it would count as part of my estate for IHT purposes. If I were to waive the debt, it would become a gift, counting from the date I waive the debt.

Thanks for the comment.

FD

Just to confirm FD's comments. I gifted large sum when my son bought flat 8 years ago. That amount no longer eligible to IHT liability.

2 months ago I paid off his remaining mortgage by way of a gift - and that tapers off over the next 7 years - so even surviving a few years reduces the IHT liability. He can thank Putin, Truss, Kwarteng et al for that gift!

T7

[scotia]

2 months ago I paid off his remaining mortgage by way of a gift - and that tapers off over the next 7 years - so even surviving a few years reduces the IHT liability. He can thank Putin, Truss, Kwarteng et al for that gift!

T7

I'm not sure that it is as simple as that. I agree that After 7 years there is no IHT liability, but for less than 7 years the "tapering" is complicated, and I think that in many cases is unlikely to happen. Perhaps some IHT expert can refresh my memory on why this is so?

[Lootman]

2 months ago I paid off his remaining mortgage by way of a gift - and that tapers off over the next 7 years - so even surviving a few years reduces the IHT liability. He can thank Putin, Truss, Kwarteng et al for that gift!

I'm not sure that it is as simple as that. I agree that After 7 years there is no IHT liability, but for less than 7 years the "tapering" is complicated, and I think that in many cases is unlikely to happen. Perhaps some IHT expert can refresh my memory on why this is so?

I don't claim to be an IHT expert but I believe the problem is that the value of the gift does not amortise evenly over 84 months as you'd expect.

Rather it only amortises over the last three (?) of those 7 years. Why, I have no idea as it makes little sense to me.

[terminal7]

I think this is latest (You need to survive at least 3 years):



T7

sorry for the formatting

Moderator Message:
Edited to add table formatting (chas49)

[scotia]

2 months ago I paid off his remaining mortgage by way of a gift - and that tapers off over the next 7 years - so even surviving a few years reduces the IHT liability. He can thank Putin, Truss, Kwarteng et al for that gift!

T7

I'm not sure that it is as simple as that. I agree that After 7 years there is no IHT liability, but for less than 7 years the "tapering" is complicated, and I think that in many cases is unlikely to happen. Perhaps some IHT expert can refresh my memory on why this is so?

I have had another look at this. I believe that a failed PET ( donor died within 7 years) is the first (bottom) item in the IHT list. So unless it exceeds the IHT Nil-Rate Band personal band (£325,000), there is no IHT tax payable on it - so there is no tapered relief. Unfortunately, all other estate items are added above the failed PET, and they will attract the IHT. So in this case it has effectively reduced the IHT Nil Rate Band. However if the PET is large - i.e. above the IHT Nil Rate Band, then that part of the PET above the band may receive tapered relief.
Now I know this sounds crazy - but I have seen this explained in multiple legal sites, so I suspect it is correct. But I would be very happy to be proven wrong

[terminal7]

This article explains the situation (hopefully with accuracy):

https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/gifting-and-inheritance-tax

T7

[Lootman]

2 months ago I paid off his remaining mortgage by way of a gift - and that tapers off over the next 7 years - so even surviving a few years reduces the IHT liability. He can thank Putin, Truss, Kwarteng et al for that gift!

I'm not sure that it is as simple as that. I agree that After 7 years there is no IHT liability, but for less than 7 years the "tapering" is complicated, and I think that in many cases is unlikely to happen. Perhaps some IHT expert can refresh my memory on why this is so?

I have had another look at this. I believe that a failed PET ( donor died within 7 years) is the first (bottom) item in the IHT list. So unless it exceeds the IHT Nil-Rate Band personal band (£325,000), there is no IHT tax payable on it - so there is no tapered relief. Unfortunately, all other estate items are added above the failed PET, and they will attract the IHT. So in this case it has effectively reduced the IHT Nil Rate Band. However if the PET is large - i.e. above the IHT Nil Rate Band, then that part of the PET above the band may receive tapered relief.

Now I know this sounds crazy - but I have seen this explained in multiple legal sites, so I suspect it is correct. But I would be very happy to be proven wrong

I have no reason to doubt that. Where it can get really messy is when someone gifts all or nearly all of their estate, and then dies within 7 years.

The executor would probably take one look at the empty estate and see no point in applying for probate - there is nothing left to distribute.

So then it would fall to any creditors of the estate to apply for probate. Most notably this might be the taxman assuming that they see that large gifts were made. In such a situation the taxman goes after the gift recipients to claim the IHT due. But how that works out in practice, I have no idea, especially if those gift recipients have spent the money, live overseas etc.

[genou]

The executor would probably take one look at the empty estate and see no point in applying for probate - there is nothing left to distribute.

Probate be damned. Only on the basis that the executor is very brave, or heroically optimistic, would they make no enquiries. They are personally liable for any IHT chargeable on the estate.

[Lootman]

The executor would probably take one look at the empty estate and see no point in applying for probate - there is nothing left to distribute.

Probate be damned. Only on the basis that the executor is very brave, or heroically optimistic, would they make no enquiries. They are personally liable for any IHT chargeable on the estate.

Well, yes, although they are only personally liable for any debts IF they take on the role. To take on probate for an estate that has been evacuated of value by gifts, but that potentially has debts and liabilities, would be foolish indeed.

Just make sure you don't intermeddle, which can make renouncing the role more tricky.

[hiriskpaul]

2 months ago I paid off his remaining mortgage by way of a gift - and that tapers off over the next 7 years - so even surviving a few years reduces the IHT liability. He can thank Putin, Truss, Kwarteng et al for that gift!

T7

I'm not sure that it is as simple as that. I agree that After 7 years there is no IHT liability, but for less than 7 years the "tapering" is complicated, and I think that in many cases is unlikely to happen. Perhaps some IHT expert can refresh my memory on why this is so?

I have had another look at this. I believe that a failed PET ( donor died within 7 years) is the first (bottom) item in the IHT list. So unless it exceeds the IHT Nil-Rate Band personal band (£325,000), there is no IHT tax payable on it - so there is no tapered relief. Unfortunately, all other estate items are added above the failed PET, and they will attract the IHT. So in this case it has effectively reduced the IHT Nil Rate Band. However if the PET is large - i.e. above the IHT Nil Rate Band, then that part of the PET above the band may receive tapered relief.
Now I know this sounds crazy - but I have seen this explained in multiple legal sites, so I suspect it is correct. But I would be very happy to be proven wrong

Very well explained. Tapering is frequently misunderstood. It doesn't help that simplified HMRC documention on tapering is wrong!

I misunderstood it until I had to deal with an estate with failed PETs.