Inheritance Tax and Interest Free Loans
Discussion
My parents are in the fortunate (or unfortunate, depending on how you look at it...) position of expecting there to be inheritance tax due on their estate on their death. They are keen to get some money over before that point to both allow us to enjoy it and to reduce the tax due.
They have come up with the idea of giving an interest free loan which is then paid off each year at the rate of £6k utilising both of their combined gift allowances. With the amounts being discussed, this would take a little over 8 years. Intrinsicaly, this seems a little dodgey to me, but does seem like a potential from what I've read. Does anyone know of any pitfalls of this meathod? Would make actual money transfers each year so there is an audit trail.
The other option would just be to gift the money now. My reading is that the 7 year rule would then apply which would mean that after 7 years there would be no tax liable, and the tax rate would be reduced as a sliding scale over that period. They think there is no sliding scale as the gift is under £325k, which I dont think is correct.
Does anyone have any thoughts / advice? Accepting that getting proper tax advice would be a good idea, but they seem eluctant to do that.
They have come up with the idea of giving an interest free loan which is then paid off each year at the rate of £6k utilising both of their combined gift allowances. With the amounts being discussed, this would take a little over 8 years. Intrinsicaly, this seems a little dodgey to me, but does seem like a potential from what I've read. Does anyone know of any pitfalls of this meathod? Would make actual money transfers each year so there is an audit trail.
The other option would just be to gift the money now. My reading is that the 7 year rule would then apply which would mean that after 7 years there would be no tax liable, and the tax rate would be reduced as a sliding scale over that period. They think there is no sliding scale as the gift is under £325k, which I dont think is correct.
Does anyone have any thoughts / advice? Accepting that getting proper tax advice would be a good idea, but they seem eluctant to do that.
All of those things are sorted, so shouldnt be an issue there.
Idea of the loan is they would like to pass the money over now so it can be used (planning on doing some house work, so they'd like to help with that rather than drip feeding. I'm indifferent, and we dont need the money, but they are keen to see the money being 'used' while they're still alive). So it's about trying to get a lump sum over now with the least tax implications.
Idea of the loan is they would like to pass the money over now so it can be used (planning on doing some house work, so they'd like to help with that rather than drip feeding. I'm indifferent, and we dont need the money, but they are keen to see the money being 'used' while they're still alive). So it's about trying to get a lump sum over now with the least tax implications.
If they live for the next eight years you get the money for free with your loan system, but you also get the money for free under the seven-year-rule.
If they pass away within the period of the interest free loan effectively you owe that money back to their estate, and then to get it out, you’ll be taxed under inheritance tax. So I can’t see the point of doing the interest free option.
If they pass away within the period of the interest free loan effectively you owe that money back to their estate, and then to get it out, you’ll be taxed under inheritance tax. So I can’t see the point of doing the interest free option.
TheLurker said:
My parents are in the fortunate (or unfortunate, depending on how you look at it...) position of expecting there to be inheritance tax due on their estate on their death. They are keen to get some money over before that point to both allow us to enjoy it and to reduce the tax due.
They have come up with the idea of giving an interest free loan which is then paid off each year at the rate of £6k utilising both of their combined gift allowances. With the amounts being discussed, this would take a little over 8 years. Intrinsicaly, this seems a little dodgey to me, but does seem like a potential from what I've read. Does anyone know of any pitfalls of this meathod? Would make actual money transfers each year so there is an audit trail.
The other option would just be to gift the money now. My reading is that the 7 year rule would then apply which would mean that after 7 years there would be no tax liable, and the tax rate would be reduced as a sliding scale over that period. They think there is no sliding scale as the gift is under £325k, which I dont think is correct.
Does anyone have any thoughts / advice? Accepting that getting proper tax advice would be a good idea, but they seem eluctant to do that.
You either have to gift the money or not for the money to be out of the estate after 7 yrs. They are also correct about the sliding scale and the £325K. They have come up with the idea of giving an interest free loan which is then paid off each year at the rate of £6k utilising both of their combined gift allowances. With the amounts being discussed, this would take a little over 8 years. Intrinsicaly, this seems a little dodgey to me, but does seem like a potential from what I've read. Does anyone know of any pitfalls of this meathod? Would make actual money transfers each year so there is an audit trail.
The other option would just be to gift the money now. My reading is that the 7 year rule would then apply which would mean that after 7 years there would be no tax liable, and the tax rate would be reduced as a sliding scale over that period. They think there is no sliding scale as the gift is under £325k, which I dont think is correct.
Does anyone have any thoughts / advice? Accepting that getting proper tax advice would be a good idea, but they seem eluctant to do that.
Just giving you the money now doesn't create any bigger tax issue though, it just starts the 7-year clock on removing it from any IHT consideration. If they each give you half then when the first one dies a smaller amount will have to be included in their estate. If it's a big enough sum start looking at putting it into a trust, but you need proper advice. Here's bit of a guide (not a recommendation)
https://www.sap-legal.co.uk/step-5-gifting
https://www.sap-legal.co.uk/step-5-gifting
Gifts less than £325k in total have no taper relief.
Taper then only is claimable above that amount on a percentage sliding scale up to the 7 year rule - assuming this doesn’t get addressed in the budget !
If the loan is used for mortgages etc that can present an issue for the receiver.
If the sums are small then simply giving is easiest.
They should keep a record though which will only really be of use to the Executors.
Taper then only is claimable above that amount on a percentage sliding scale up to the 7 year rule - assuming this doesn’t get addressed in the budget !
If the loan is used for mortgages etc that can present an issue for the receiver.
If the sums are small then simply giving is easiest.
They should keep a record though which will only really be of use to the Executors.
It depends on the numbers that they are trying to "lose" but the loan plan sounds weirdly complicated to me.
imho:
- The annual gifts amount should be used regularly (April 7th is the date in our family
).
- Gifts from income can work but as I understand it needs to well documented in case it needs to later be proven. And I can imagine this is a loophole (?) that the current gov might try and close asap. And it requires unused income to be there in the first place (which can as I understand it be pension income).
- paying for stuff when out and about - seems like small amounts but it soon adds up when you do the maths.
- bundles of cash - Who's to say what the cash was spent on?
We've discussed quite openly for example that if they pay for dinner it costs £X - If I pay for dinner, it costs X + 40% (IHT) of X + (My marginal tax rate)% of the rest as there is a big ol' pension that is never getting touched by them - i.e. If you do the maths on that, each dinner "saves" way more than the cost of the dinner from being given to the tax man......
The biggest thing they can do (in our family though) is spend it as fast as they can on themselves - holidays, hotels, champagne etc etc - And even with that mindset, they can't spend it fast enough!
(And the challenge with larger numbers still exists though - i.e. losing £50K might be manageable, losing £500K is a little bit trickier......)
imho:
- The annual gifts amount should be used regularly (April 7th is the date in our family
).- Gifts from income can work but as I understand it needs to well documented in case it needs to later be proven. And I can imagine this is a loophole (?) that the current gov might try and close asap. And it requires unused income to be there in the first place (which can as I understand it be pension income).
- paying for stuff when out and about - seems like small amounts but it soon adds up when you do the maths.
- bundles of cash - Who's to say what the cash was spent on?
We've discussed quite openly for example that if they pay for dinner it costs £X - If I pay for dinner, it costs X + 40% (IHT) of X + (My marginal tax rate)% of the rest as there is a big ol' pension that is never getting touched by them - i.e. If you do the maths on that, each dinner "saves" way more than the cost of the dinner from being given to the tax man......
The biggest thing they can do (in our family though) is spend it as fast as they can on themselves - holidays, hotels, champagne etc etc - And even with that mindset, they can't spend it fast enough!
(And the challenge with larger numbers still exists though - i.e. losing £50K might be manageable, losing £500K is a little bit trickier......)
Thanks all. So just to clarify on the 7yr taper releif; (keping it simple to one person) say the estate is worth 500k and a gift of 50k is made.
On death after 7yrs the estate would be deemed to be worth 450k (500-50) and so tax would be due on 125k (450-325).
Within the whole 7yrs after point of gift the estate would be deemed to be worth the full 500k, with no taper releif on the gifted 50k as the total gift value was less than £325k?
On death after 7yrs the estate would be deemed to be worth 450k (500-50) and so tax would be due on 125k (450-325).
Within the whole 7yrs after point of gift the estate would be deemed to be worth the full 500k, with no taper releif on the gifted 50k as the total gift value was less than £325k?
Not necessarily as depending on who the house is left to ( say you for expediency ) another £175k may be available in IHT relief as their primary residence.
This is also per person but itself tapers off at £2m so with a house worth £2.35m is 0.
As the £325k is per person though that’s £650k straight off with a further £350k estate potential.
This is also per person but itself tapers off at £2m so with a house worth £2.35m is 0.
As the £325k is per person though that’s £650k straight off with a further £350k estate potential.
Gifting regularly out of surplus income falls outside IHT. So, if the source of the regular sums being considered can be within the definition of surplus income, that's the way to go.
Gifting lump sums will fall into the IHT calculation if they have been made within 7 years of death. As mentioned above, there is a sliding scale depending on the number of years gifted before death.
The estate executors are required to report all gifting, both out of surplus income and lumps sums, when calculating IHT as part of the probate application process. IHT form 403 is used for this purpose; section 7 for lump sums and section 20 for gifts out of surplus income. Best advice is to record gifting as it is made otherwise the executors will have a real task finding out what happened in the past. I do this by having a copy of form IHT 403 on my laptop and update it whenever my wife and I do any gifting, and ensure our executors have the latest version or know where I keep it.
All the above is subject to the upcoming 2026 Budget.
R.
Gifting lump sums will fall into the IHT calculation if they have been made within 7 years of death. As mentioned above, there is a sliding scale depending on the number of years gifted before death.
The estate executors are required to report all gifting, both out of surplus income and lumps sums, when calculating IHT as part of the probate application process. IHT form 403 is used for this purpose; section 7 for lump sums and section 20 for gifts out of surplus income. Best advice is to record gifting as it is made otherwise the executors will have a real task finding out what happened in the past. I do this by having a copy of form IHT 403 on my laptop and update it whenever my wife and I do any gifting, and ensure our executors have the latest version or know where I keep it.
All the above is subject to the upcoming 2026 Budget.
R.
TheLurker said:
Thanks all. So just to clarify on the 7yr taper releif; (keping it simple to one person) say the estate is worth 500k and a gift of 50k is made.
On death after 7yrs the estate would be deemed to be worth 450k (500-50) and so tax would be due on 125k (450-325).
Within the whole 7yrs after point of gift the estate would be deemed to be worth the full 500k, with no taper releif on the gifted 50k as the total gift value was less than £325k?
Correct, taper relief only applies if gifted amounts are in excess of the nil rate band (currently £325k). So in your example with a gift of £50k, the person would have to survive seven years and taper relief would not apply.On death after 7yrs the estate would be deemed to be worth 450k (500-50) and so tax would be due on 125k (450-325).
Within the whole 7yrs after point of gift the estate would be deemed to be worth the full 500k, with no taper releif on the gifted 50k as the total gift value was less than £325k?
To be honest, your interest-free loan idea seems unnecessarily complex. Much simpler to just use the £3k per person annual IHT gift allowance, surely? It's also worth bearing in mind that any unused allowance can be carried forward for just one year.
As has already been mentioned, gifts out of excess income is an additional route to investigate. But the key words are 'excess' and 'income' - gifts have to be made from income (not capital) and they have come from surplus income (i.e. the lifestyle of the person making the gift can't be adversely affected).
Gifts out of excess income does involve lots of accurate record keeping, though (including income and expenditure by tax year). Obviously, a will's executors need to know where these records are kept, because they'll have to provide them to HMRC eventually.
TheLurker said:
My parents are in the fortunate (or unfortunate, depending on how you look at it...) position of expecting there to be inheritance tax due on their estate on their death.
Do they currently have mirror wills that leave everything to each other? If so, then there'd be no IHT to pay if one parent predeceases the other (assuming that they're married or in a civil partnership).As is often the case, the question of IHT becomes more of an issue upon the death of the surviving spouse.
TheLurker said:
Idea of the loan is they would like to pass the money over now so it can be used (planning on doing some house work, so they'd like to help with that rather than drip feeding.
No idea how much checking of these things is done, but I’ve certainly heard of builders being paid directly by parents. Can you imagine just how much cash cascades down most families in this country?
I reckon only about 1% of the UK population who have IHT due actually give a flying f
k about it and try to calculate it correctly.
The remaining 99% (many of whom will be white van men / women) probably won't even fill in the forms and will have made damn sure that all the money in their ill / dying relative's estate has been taken care of long before they die.
Even if they get caught out with a rapid unexpected death, the immediate family will be round the house of the deceased before the body has even stopped twitching in the morgue.
It's an absurd tax which should be treated with contempt.
Loved by the evil Left of course.
I reckon only about 1% of the UK population who have IHT due actually give a flying f
k about it and try to calculate it correctly.The remaining 99% (many of whom will be white van men / women) probably won't even fill in the forms and will have made damn sure that all the money in their ill / dying relative's estate has been taken care of long before they die.
Even if they get caught out with a rapid unexpected death, the immediate family will be round the house of the deceased before the body has even stopped twitching in the morgue.
It's an absurd tax which should be treated with contempt.
Loved by the evil Left of course.
C69 said:
Do they currently have mirror wills that leave everything to each other? If so, then there'd be no IHT to pay if one parent predeceases the other (assuming that they're married or in a civil partnership).
As is often the case, the question of IHT becomes more of an issue upon the death of the surviving spouse.
That's why you don't have mirror wills - the first one to go leaves it to the children, not the spouse. As is often the case, the question of IHT becomes more of an issue upon the death of the surviving spouse.
Mr Pointy said:
That's why you don't have mirror wills - the first one to go leaves it to the children, not the spouse.
Sorry I m being a bit dense but why would you do this ?We have mirror wills which leave everything to each other and then on the death of the second or or we go together everything then gets left to the children less a cash gift to our grandchild.
In doing this it allows the max amount of IHT on both first and second death.
Leaving it to the children upon the first death implies you then need a trust or similar for the survivor ?
Edited by alscar on Wednesday 23 September 18:24
alscar said:
Mr Pointy said:
That's why you don't have mirror wills - the first one to go leaves it to the children, not the spouse.
Sorry I'm being a bit dense but why would you do this ?For the OP it's significant that making an interest free loan is not a gift for IHT purposes BUT the interest foregone IS a gift of that interest each year. So long as the interest foregone does not exceed £3,000 a year this isn't an issue although it does reduce the amount available for other exempt gifts in that year.
https://www.gov.uk/hmrc-internal-manuals/inheritan...
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