Can anyone more experienced with IHT help with how an executor lists a loan on the IHT400 where the loan (£700k) from the deceased was to be repaid in her lifetime on the future sale of a property (small terrace) with any shortfall potentially being written off as a discretion if the value of the sale was less than the value of the loan. The shop has decreased in value since the death of the creditor (a family member of the deceased). What is the value of the loan? Or is the entire transaction viewed by HMRC a gift? Would the executor have the discretion not to write off any of the loan at all post death so he can list it as a loan of the full amount? The loan was made orally and there is no paper trail except a handwritten note claiming the deceased would write off any shortfall at her discretion and it was interest free - but there was no contemplation of her death as she wasn’t of advanced age.
There are two aspects: a failed PET and a debt. Both would be valued on a commercial basis reflecting the terms of the loan. Those terms appear to include provisions that repayment is only triggered by sale of the property and that the repayment is capped at the value of proceeds of the sale.
Assuming the shop is the same as the small terrace, you would value the loan on a commercial basis at death - i.e. if there is a shortfall so that recovery is capped at the value of the property, I would initially value the loan at the value of the property. You could then argue for a substantial discount in value because there is no fixed term and the lender has no ability to demand repayment.
The PET would be the value of the sum advanced to the borrower, minus (probably) the value of the loan immediately thereafter. If you have discounted the value of the loan above, you should probably follow through and discount the loan here by the same proportion.
Discounts on the loan to reflect the inability to demand repayment would therefore decrease the value of the loan but increase the value of the failed PET.
Thank you, that is extremely useful. Would it be HMRC deciding and applying any discount for the lack of repayment on demand etc? Is there guidance on that?