Borrowing against a deed of variance?

[gmaz]

Is it possible to set up a deed of variance and then borrow against it?

The reason i ask is that a relative of my wife has recently passed away and left (let's say for example) £50K to her. A friend who is training as a financial advisor has suggested she can pass the £50K to our child via a deed of variance, but then borrow against it at an arbitrary interest rate, let's say 10%.

So, we get the £50K now to spend on cars, holidays etc. We die in 20 years, so the loan value is now £50K + £100K (20 x £5K) interest. The loan is paid off giving the child £150K from our estate before IHT is applied.

That is how she explained it, which seems dodgy to me. Can anyone confirm if this is possible, and legal?

[alscar]

A DOV in effect means your wife’s relative estate passes the £50k directly to your children so your wife never receives it.
As such she won’t have the £50k to borrow against.
And if she didn’t do the DOV and somehow managed tomorrow against it whilst retaining it when it comes to her estate it’s possible that IHT may then be due.

[alscar]

To borrow not tomorrow.

[bennno]

alscar said:

A DOV in effect means your wife s relative estate passes the £50k directly to your children so your wife never receives it.
As such she won t have the £50k to borrow against.
And if she didn t do the DOV and somehow managed tomorrow against it whilst retaining it when it comes to her estate it s possible that IHT may then be due.

Think you ve misunderstood, I think the OP is suggesting that the inherited money is redirected to the child, then they borrow it from the child with an agreement to pay back at some point, allowing interest to accumulate on top - to be offset against a future inheritance.

[gmaz]

bennno said:

alscar said:

A DOV in effect means your wife s relative estate passes the £50k directly to your children so your wife never receives it.
As such she won t have the £50k to borrow against.
And if she didn t do the DOV and somehow managed tomorrow against it whilst retaining it when it comes to her estate it s possible that IHT may then be due.

Think you ve misunderstood, I think the OP is suggesting that the inherited money is redirected to the child, then they borrow it from the child with an agreement to pay back at some point, allowing interest to accumulate on top - to be offset against a future inheritance.

Yes bennno, that is how it it was explained to us.

[BlackTails]

Stripping this down:

- money is left to your wife
- your wife sets up a sham DoV redirecting the money to their child
- it s a sham because the money comes straight back to your wife to benefit her, at her insistence - there d be no DoV without the loan back
- the sham is varnished by a non commercial (even at today s rates) rate of interest imposed by the borrower rather than the lender
- the rate of interest is intentionally high so as to inflate the debt plus interest on the deaths of you and your wife. Why? To try to evade IHT.

I wouldn’t take estate planning advice from a financial advisor in training, even without hearing about this idea.

Edited by BlackTails on Saturday 21st June 15:23

[alscar]

bennno said:

Think you ve misunderstood, I think the OP is suggesting that the inherited money is redirected to the child, then they borrow it from the child with an agreement to pay back at some point, allowing interest to accumulate on top - to be offset against a future inheritance.

You’re right - I had misunderstood - apologies -I clearly thought that the trainee advisor couldn’t possibly be right though.
As BT had said it sounds just plain wrong.
The DOV is a legal document and presumably the children would actually prefer the money now - I get the interest bit on top but ending up with loaned money which was originally the beneficiarys to then in effect evade potential IHT down the line just seems wrong.

[Sheepshanks]

I suppose it'd be fine as long as no-one looked at it at IHT time - and then the OP is dead so won't be worried about it.

[Count897]

alscar said:

evade potential IHT down the line just seems wrong.

Avoid.

We don’t know if this is illegal yet. Great scam though this is the kind of thinking we need in the finance forum.

[Steve H]

Count897 said:

alscar said:

evade potential IHT down the line just seems wrong.

Avoid.

We don t know if this is illegal yet. Great scam though this is the kind of thinking we need in the finance forum.

It’s exactly how tax is avoided without being evaded.

Unsure which applies in this case though and also begs the question of whether if this form of avoidance, even if legal now, could get picked up down the line and have penalties applied retrospectively?

[omniflow]

The whole dead of variation thing is clouding the issue somewhat.

The underlying question is can you borrow money from your kids on an interest only basis - with the capital and rolled up interest paid back from your estate once you die? With the follow on question being - if you can do this, and you do do this, does it reduce the size of your estate for IHT purposes?

My assumption is that if it were possible, we'd have heard about it before now.

[gmaz]

Last time I did my self-assessment it asked if I was using any tax avoidance schemes. If I did this, I would probably have to tick "yes", because if you tick "no" and HMRC decide it is avoiding IHT, then you are defrauding them.

[Sheepshanks]

gmaz said:

Last time I did my self-assessment it asked if I was using any tax avoidance schemes. If I did this, I would probably have to tick "yes", because if you tick "no" and HMRC decide it is avoiding IHT, then you are defrauding them.

That means an organised tax avoidance scheme, not some random personal action.

[AndyAudi]

omniflow said:

The underlying question is can you borrow money from your kids on an interest only basis - with the capital and rolled up interest paid back from your estate once you die? With the follow on question being - if you can do this, and you do do this, does it reduce the size of your estate for IHT purposes?

My assumption is that if it were possible, we'd have heard about it before now.

Yes you can, we’ve used to keep elderly relatives liquid after they passed down the bulk of their assets.

Taking security, against their house so it doesn’t disappear in care fees etc

[Caddyshack]

Yes, it is quite common for a trust to contain a loan note and interest charged.

Dov is quite common with the above.


Also look at discounted gift trusts, you MUST retain and income but give away the cash.

[greengreenwood7]

Not the same as per OP's original question, but i'd wondered about gifting offspring an amount of money - verified if necessary by a Notary etc and then borrowing back as/when at a defined interest rate.

I've searched albeit online to try to get a sense of why this wouldn't be allowable ( assuming that i live past the 7 year IHT rule) and haven't found any comment either way.
i guess there'd be a difference if the whole of the 7 years had passed before borrowing back? (rather than gifting 'today' and starting to use borrowed funds a few mths later)

Anyone got any solid views / experiences?

[Caddyshack]

greengreenwood7 said:

Not the same as per OP's original question, but i'd wondered about gifting offspring an amount of money - verified if necessary by a Notary etc and then borrowing back as/when at a defined interest rate.

I've searched albeit online to try to get a sense of why this wouldn't be allowable ( assuming that i live past the 7 year IHT rule) and haven't found any comment either way.
i guess there'd be a difference if the whole of the 7 years had passed before borrowing back? (rather than gifting 'today' and starting to use borrowed funds a few mths later)

Anyone got any solid views / experiences?

I can’t see why that wouldn’t work, it would essentially be an unrelated loan. Can’t see if being gift with reservation.

You might be safer with a documented discounted gift
structure imo.

Ultimately the person completing probate has to answer if any gifts were made within the last 7 yrs. the estate is based on a net value after loans have been deducted to be repaid. People repay mortgages all the time at death before the estate is valued, anyone can have a mortgage deed on your property and that can have roll up interest as per some lifetime mortgages.

[BlackTails]

greengreenwood7 said:

Not the same as per OP's original question, but i'd wondered about gifting offspring an amount of money - verified if necessary by a Notary etc and then borrowing back as/when at a defined interest rate.

Tax authorities tend to look at the substance of the transactions rather than their form.

If you gift money to you child and borrow it straight back, it suggests that the gift and the loan are inter-dependent: you only gift the money knowing it will be lent back, and your child only lends you money because they have been gifted it.

If so, the substance of the transaction is nil: you keep your money.

If you then pay interest to your child on the “loan”, and the loan isn’t a real loan, you’re gifting your child the interest payments.

Bottom line: the principal never leaves your estate and is part of your estate for IHT, and the interest payments you make are gifts subject to IHT and the usual 7 year IHT rules.

[mikeiow]

AndyAudi said:

omniflow said:

The underlying question is can you borrow money from your kids on an interest only basis - with the capital and rolled up interest paid back from your estate once you die? With the follow on question being - if you can do this, and you do do this, does it reduce the size of your estate for IHT purposes?

My assumption is that if it were possible, we'd have heard about it before now.

Yes you can, we ve used to keep elderly relatives liquid after they passed down the bulk of their assets.

Taking security, against their house so it doesn t disappear in care fees etc

That starts to sound like deliberate Deprivation of Assets…..have a google, & be aware it is something that is very frowned upon, and be aware that there’s no time limit on how far back the council can look at your financial affairs to see if there has been deprivation of assets.
Unadvisable!

[AndyAudi]

mikeiow said:

AndyAudi said:

omniflow said:

The underlying question is can you borrow money from your kids on an interest only basis - with the capital and rolled up interest paid back from your estate once you die? With the follow on question being - if you can do this, and you do do this, does it reduce the size of your estate for IHT purposes?

My assumption is that if it were possible, we'd have heard about it before now.

Yes you can, we ve used to keep elderly relatives liquid after they passed down the bulk of their assets.

Taking security, against their house so it doesn t disappear in care fees etc

That starts to sound like deliberate Deprivation of Assets ..have a google, & be aware it is something that is very frowned upon, and be aware that there s no time limit on how far back the council can look at your financial affairs to see if there has been deprivation of assets.
Unadvisable!

Take your point but, reasoning & timing come into its bit, it’s not clear cut.

If you pass on say a business & leave yourself enough for your retirement that’s fine. Later discover cost of living etc means you didn’t leave yourself enough that’s not of assets as the intent wasn’t there. Taking out a loan will generally be secured to prevent a situation of non repayment on death.

Key thing with OP’s scenario is by diverting an inheritance with a deed of variation, it will never really be theirs as they haven’t accepted it. It’s two separate agreements