Splitting of debt on death of lender

A family investment company is established by way of a loan from X. It is a simple debt, interest free, repayable on demand. X dies with all or part of the loan still outstanding and his Will provides for his estate to be divided between his 3 children. There is no express provision in the Will regarding the debt.

The executors/children do not wish to call in the loan immediately, but the children would each like to own 1/3rd of the debt and be able to decide in the future
when to draw down from their own share. I understand that legal (as opposed to beneficial) ownership of the debt cannot be split, and I wondered whether any contributors have come across this situation and if so, how they dealt with it?

Diana Smart
Gordons LLP

It will very much depend on the terms of the Will. Do the Exors hold the residue on bare trust for the 3 children in equal shares? If so there may be nothing to prevent them continuing to hold it.

Depending on the size of the loan you could either simply renegotiate it between the parties, or if necessary bed and breakfast it via a series of repayments to the children that are reintroduced, potentially over a series of days if required. That would raise issues that the family lawyers would be very interested in, I’m sure.

You also need to consider CGT on repayment of second hand debts, I think? Is an interest free debt repayable on demand worth the same as cash in the bank?

Stuart Maggs
Howes Percival LLP