I have come across a situation which doesn’t sit quite right with me and wondered what forum members felt about it.
Shortly after I started dealing with an estate the children of the deceased let me know that there were some gifts made to them in recent years. These were described to me as a loan of £300,000 to daughter to complete the purchase of a property. This was in September 2017. In December 2017 £130,000 was repaid to the deceased and in May 2018 £130,000 was gifted to the son.
I have prepared the IHT400 and associated schedules. In the process of getting these approved i received the usual misunderstanding about Taper Relief (they thought it would reduce the value of the gift - deceased died October 2020). To support their point of view, the family have produced a declaration signed by the deceased stating that the original £300,000 was a gift, not a loan (one would presume for mortgage purposes) and that there was no intention of repayment.
I believe that this now means there are three separate gifts.
300k from mother to daughter
130k from daughter to mother
130k from mother to son
Therefore, the whole NRB is used up and extra IHT will be due on the £105,000.
My concern is that the actual loss to the estate from gifts 1 and 2 is £170k when taken into account together.
Should I be declaring the full £300k gift as declared, or the £170k loss to the estate?
I think the first step is to determine whether the £300,000 was intended to be a gift or a loan. This should be a matter of fact for the daughter to confirm. If they are the executors then it is up to them to ensure that any declarations are accurate or else they could face penalties from HMRC for knowingly filling incorrect information. If it was a loan, and the declaration was purely for mortgage purposes then this amounts to mortgage fraud by the daughter (but does not affect your administration of her mother’s estate).
If it is a loan then the balance of the loan outstanding (£170,000) will be an asset of the estate. The only gift in that case would be the £130,000 to the son. If it was a gift then the gifts would total £430,000 (£300,000 to daughter and £130,000 to son).
If there is any doubt by the clients then you can complete the return in the most beneficially way but disclose in full to HMRC the circumstances and that this could be viewed in a different way. In that way you have not misfiled and you have flagged the discrepancy to HMRC. In the first instance though you should try to declare based on the available facts.
Hmm, I would say declare the £300,000 (ie £170 + £130) as a gift; it would appear that payment to daughter was originally intended to be a loan (given the repayment back to mum) but then after, she changed her mind to in effect say ‘keep it’ therefore, providing she was of sound mind, when she signed the statement stating it was a gift, at that point, that date, it became a gift.
That’s how I see it, I mean this isn’t contractual, I don’t believe the part payment of a debt rules apply because from memory that is aimed to cover ‘commercial’ situations and doesn’t prevent a loving mother absolving her daughter of monies due and thus creating a gift?
IHT aside, are the children the executors? Are they the beneficiaries? (Therefore are they able to agree with such school of thought?)
Were annual allowances used or could these be off set against the gifts?
Any TNRB / RNRB available (you may just not have thought this relevant I appreciate that).
Parents will often help their children finance a property purchase and, whilst intending a loan, will completer a declaration stating that the financial support is by way of gift, otherwise the mortgagee will not lend the monies needed to finance the purchase.
The parents often do not take any advice at that time and so make the declaration without considering its true significance.
On the basis that the lender would not have advanced the mortgage unless the parents made the declaration, I suggest that the family are stuck with the effect of that declaration – the £300,000 being a gift.
To assume that any such declarations can be entered into without any intention to follow through with the reality of it being a gift would be to encourage the commission of a fraud against the mortgagee.
Not a happy situation.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
An analysis of all the facts and circumstances surrounding the gift of £300,000 including contemporary statements of involved parties and their likely admissibility. Individuals in a family context can be genuinely vague about such matters and do not even consider taking professional advice. The outcome is likely then to be determined by arid legalistic principles applied retrospectively. Executors in this position would prudently be now advised about these and bear in mind that as regards HMRC full disclosure is even more prudent based on that advice and that every point in HMRC’s favour will be advanced, not least bad ones.
If there is no acceptable evidential basis for the “loan” or its “repayment” there must be a very strong possibility of a gift and gift back. I once persuaded HMRC to accept that a family company’s controlling shareholding should be valued with underlying loans off its published balance sheets. The company had been incorporated from a partnership where they were clearly on balance sheet and never repaid or exchanged for shares. This incorporation had been done DIY with documentation from precedents in Exchange and Mart or similar. It followed of course that thereafter for tax if not other legal purposes the company still owed the debts.
If there was originally a loan it cannot be forgiven in law without due formality viz a deed, a point HMRC can and do take (when it suits them!).
Advisers beware executors with poor fiscal hygiene. Some suffer from the “Fred Syndrome”. " How many properties do you have, Fred?". " How many should I have, Jack?" Heart sinks. Retainer terminates.
I can personally vouch for the fact that this is not a unique scenario, as Paul Saunders says, and for the reasons that he sets out.
The problem for the executors is that they have documentary evidence that states that the initial payment of £300K was a gift. If the Executors then try and have that payment treated as a loan and pay IHT accordingly, then when HMRC make enquiries the executors could well be faced with penalties on the basis of the tax underpaid.
Graeme Lindop Probate Consultant Coles Miller Solicitors LLP
