We are instructed on a matter where the sole Beneficiary under the Will made soft loans to the deceased in the years prior to her death. My query is whether soft loans are deductible for IHT purposes and in what circumstance?
In addition, what is the position where the lender of the soft loan(s) is also the Beneficiary under the Will?
Many thanks
One of the schedules to the Inheritance Tax Account (IHT419) is for use inter alia when the deceased owed a debt to a close friend or relative. It asks for the information about the debt/loan that will enable HMRC to decide whether or not to pursue the matter.
Cliona O’Tuama
Solicitor
A loan from a family member is not an automatically denied deduction on the borrower’s death.
The issue is whether the monies advanced were by way of gift or loan. If the intention of both parties was that such monies were advanced by way of loan what evidence exists to support the intention. Presumably there is some form of evidence setting out the terms of the loan even if not in in some long drawn out loan document. However, there would need to be some evidence confirming details as to date(s) of repayment, whether secured or not and whether interest was to be charged and if so at what rates.
The less actual evidence the more likely a deduction will be denied. The loan must be legally repayable and enforceable; moral commitments to repay are unacceptable.
Where the lender is also a beneficiary under the borrower’s will the issue is whether the beneficiary takes both his inheritance and still is entitled to the debt being repaid. Referred to as the “equitable presumption of satisfaction” which is that the presumption (subject to rebuttal) is that the legacy is intended to satisfy the outstanding debt.
The presumption applies subject to the facts eg was the loan made before the will was made; is the legacy a pecuniary legacy which is equal to or greater then the debt; etc. Also, what is provided in the will in this regard?
As a general rule the presumption is often rebutted by the will terms.
Malcolm Finney
As an aside, care may need to be taken if the original loans made by the beneficiary had in any way derived from the deceased, in which case they could be caught by s103 FA1986 for IHT purposes (meaning the loan would not be allowed as a deduction):
IHTM28362 - Inheritance Tax Manual - HMRC internal manual - GOV.UK (www.gov.uk)