I have a situation where a client is considering loaning proceeds of sale of a property to their daughter, to enable her to buy a property of her own. That loan would then be the basis of a mortgage, which the daughter would repay at an annual interest of 3%.
I am considering whether or not this would be a pre-owned asset issue.
My thoughts are that as the mortgage would remain in the estate (as an asset for IHT) but would reduce over time as the repayments are made that there would not be any POAC as the asset is in the estate and so would be subject to IHT.
I wanted to get some other thoughts on the situation, so would be grateful for anyone else’s perspective!
The pitfalls are rather related to the T&Cs of the loan. If the loan is a demand loan the rate of interest does not matter: it is not a TOV for IHT. Poor creditworthiness of the borrower or lack of security might cause a TOV if it reduced the value of the loan to an assignee (ignoring, as one must, whether or not it is assignable and the fact, if true, that there is no market).
If there is a fixed term then in addition unless the interest rate is market value (and any other terms are not unduly favourable to the borrower) there will be a TOV because the market value of the right to repayment at the contract rate of interest will be less than the amount lent. However this would be a PET as a loan to an individual. The market rate of interest will depend on whether the loan is secured and the value of the security. One tries to benchmark the terms with the market and retain the evidence of having done so.