Use loans for an inheritance tax (IHT) ‘halfway house’

The issue

From a purely tax perspective, IHT exposure can be limited by reducing the assets held at death. As such, the simplest advice is to make gifts of assets to family members during lifetime. Provided they survive seven years from the date of the gift and they do not benefit in any way from the asset gifted, the value of that asset will not be subject to IHT on their death. However, this advice is not particularly helpful to people who want to balance sensible IHT planning with the security of being able to hold onto and enjoy significant assets. Procrastination can lead to inactivity, which can then lead to significant IHT liabilities.

Loans can offer a simple and useful ‘halfway house’ way of IHT planning for individuals who are not comfortable giving too much away.

Example

Joe is 75 and has an estate worth about £3m. Although he understands the IHT benefit of gifting assets, he is looking forward to a long life and is optimistic that he will live well beyond 100. As such he is not comfortable giving assets away. On the other hand he lives a relatively frugal existence and his estate is growing through various investment portfolios. Although he does not want to give assets away he is prepared to lend £300,000 to his 14 year old grandson. He sets the terms of the loan as interest-free and repayable upon demand, so he can call on the monies should he need them. The making of this loan has the effect of freezing the value of the £300,000 loan in Joe’s estate. Any growth in value will fall into the grandson’s hands. Furthermore, any income from investments made with the £300,000 will be taxed in his grandson’s hands (mostly at 0%).

Forbes Dawson view

Loans are a simple way of reducing IHT exposure without the need to make irrevocable gifts, which can be emotionally harder to commit to. If the grandson can invest the £300,000 and turn it into £650,000 in 10 years, then that would represent an IHT saving of £140,000 (40% of £350,000).

Simple loans to individuals (like this) can be effective, as well as more complicated structures involving loans to trusts or to family investment companies, the shares in which are held by trusts. One advantage of trusts here is that the trustees can control, if and when, the grandson (and other beneficiaries) can receive any profits. Compare this to a loan made directly to the grandson, where he could access all of the growth in value i.e., the £350,000 in this example.

A great attraction of loans is that they can be reversed (by being paid back), whereas gifts have to be irrevocable to be effective.

 

Search

Sign up for our newsletter

Interested in receiving the latest tax planning ideas?

Sign up to Tax Bites – our weekly update offering practical but effective tax saving tips.

Contact Us

You can use this form to request us to give you a call or if you prefer just leave us a message. Please be sure to leave us a contact number or email address for you and we will get back to you as soon as we can.

Phone
0161 927 9277

Email
office@forbesdawson.co.uk

Address
Fairbank House
Ashley Road
Altrincham
Cheshire
WA14 2DP