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Ask Your Own Question, Chartered Certified Accountant
Category: Tax
Satisfied Customers: 4995
Experience:  FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
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I want to make my son an interest-free loan towards house

Resolved Question:

I want to make my son an interest-free loan towards house purchase.In round figures, the loan would be £100,000 to be repaid over 10 years at £10,000 pa.I need to know what the situation regarding potential inheritance tax would be were I to decease within 7 years of loan commencement?Since I am married, would it be to any advantage if the loan were arranged in joint names?Is there any other way you can think of the minimise potential liability?
Submitted: 1 year ago.
Category: Tax
Expert: replied 1 year ago.

Hello and welcome to JustAnswer. I am here to help you. I will review your question and will respond to you shortly.

Customer: replied 1 year ago.
Fair enough
Expert: replied 1 year ago.

Thank you for your question..

Any outstanding loan is a debt and it will form part of your estate for IHT purposes whereas a gift is deemed a potentially exempt transfer and seven years rule applies to the latter.

A loan in joint names (husband and wife) to your son would mean that 50% of outstanding sum would form part of each person's wealth for IHT purposes.

I am not clear what the intention is .. gift the money or give the sum as a loan.

The liablity to IHT would only materialise if the combined wealth was in excess of threshold for IHT (currently £325k each)

More information on inheritance tax and gifts can be found here

I hope this is helpful and answers your question.

If you have any other questions, please ask me before you rate my service – I’ll be happy to respond.

Customer: replied 1 year ago.
Many thanks, I'm still digesting what you've said and may need bit more expansion. Will be back to you soon.
Expert: replied 1 year ago.

Thank you for your reply.

Customer: replied 1 year ago.
OK, so you've clarified nicely the difference between a loan and gift from the IHT perspective.
As I said, my original intention was to make this an interest free 10 year loan.
These next question might be removed from your expertise but:-
1. Would it be usual (or prudent) in this scenario for the recipient to cover the loan with a reducing term life insurance policy?
2. Would it be reasonable to place a charge against the purchased property (you never know when a couple might split and what the terms of departure might be).
Expert: replied 1 year ago.

Thank you for your reply.

I am happy to express my views on the two questions now put..

1. There is no reason why you/the recipient of the loan should not consider a reducing term life insurance policy.. speak to and IFA and get some quotes.

2. I see no reason why you can't place a charge (maybe a second charge if your son is also having a mortgage). Your conveyancing solicitor would have to advise the main lender of your intention to have a second charge on this amount.

I hope this is helpful and answers your question.

If there are no more issues, I will appreciate if you would kindly rate my service/accept the service I have provided before you leave the site, to ensure I get credited for it by Just Answer. and other Tax Specialists are ready to help you
Expert: replied 1 year ago.

I thank you for accepting my answer.

Best wishes.