As we all know, money is a sensitive topic for most people and it can often be the cause of disputes between family, friends and even businesses. It is not uncommon for a parent to loan money to a child for any reason. In a lot of cases, clients would like this money either paid back to their estate, or they would like that child’s share to be reduced by the outstanding sum should they pass away before the loan is repaid. However, there are some clients who are happy to forgive the debt. In this edition of Did you know? we will look at this option.
In a way, this is the reverse option of the Hotchpot clause we have previously published an article on. Rather than the executors taking account of any debts a beneficiary owed the testator and deduct any gifts appropriately, the executors will instead abolish the debt and distribute the estate as the will directs.
The reasons for this can vary. The testator may have decided that the debtor can keep any money they owe if it has not been paid back at the time of death, rather than passing to other beneficiaries.
What does the testator need to do?
Similar to the provisions of a Hotchpot clause, the testator should keep records of any loans made to the individuals including any sums that has been repaid. This will be highly important for the executors for calculating any inheritance tax (IHT) due.
The testator will also need to provide the names of the individual(s) who owe them money so they can be appropriately referred to in the Will.
Is there anything else to consider?
Loans between family members have difficulties. HMRC will treat loans between family as not legally enforceable and as gifts unless either:
- the deceased person and the debtor made a written or verbal agreement about repaying the loan when the money was lent. Written is highly advisable for evidence of the terms.
- there’s evidence that the debtor was making regular repayments to the testator
A release in the will would not be effective if it is not treated as a loan. In such cases it would be treated as a gift in made in lifetime and therefore it would be a Potentially Exempt Transfer (PET).
The testator could decide to relieve the debtor of the loan during their lifetime at a later date. Doing so would instead be treated as a PET from the date of forgiving the debt. If the client decides to do this, HMRC will require a deed to show this. It is also advisable the client re-writes their will to remove reference to them forgiving the debt.
For more information on PETs, please see our previous article on the topic.
The outstanding sum that has been forgiven in the will is treated as being gifted to the debtor by the will for IHT purposes, therefore it is considered to be part of the taxable estate.