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taxadvisor.uk, Chartered Certified Accountant
Category: Tax
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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

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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?

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

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

https://www.gov.uk/inheritance-tax/gifts

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.

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).

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.

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