Was it a gift or was it a loan?

25 July 2019

Many newspapers carried the story last month of a mother, Mary Farrell, who claimed that the money advanced to her son, Ray, to assist with a house purchase was a loan and not a gift. She claimed that the money should therefore be repaid to her on Ray’s death, rather than pass to his widow, Amanda.

Mrs Farrell’s claim failed. She could produce no evidence of a loan, and in the absence of evidence to the contrary, the Common Law 'Presumption of Advancement' applied; the payment of money from parent to child is deemed to be a gift.

Financial assistance from parents to children to help them get on the property ladder is increasingly common, in part a product of the reversal of the historic trend for children to be better off than their parents. Members of the 'baby boomer' generation (like me) find that our children simply can’t afford to buy a home at the comparatively young age at which we bought our first home.

Whether financial assistance to a child is by way of loan, gift or taking a share in the child’s property will depend on a mixture of trust, risk, tax, practicality and the warmth of the parent’s heart.

If the financial assistance is to be a loan, then it’s so very important to have something in writing signed by the child, confirming the amount loaned, when it’s to be repaid and any other agreed terms (as to the payment of interest - or not - perhaps).  None of us wants to contemplate the possibility of our children dying before us, but there is a whole raft of other instances where evidence of the loan may be useful - a child’s bankruptcy or a relationship turning sour, for example.

A fair number of parent-to-child loans are made with the intention of writing the loan off (and thus turning it into a gift) at a later date, such as when the child has developed financial maturity, when their relationship with the boyfriend/girlfriend with whom they’re buying the property has proved to be durable, or when the parent is comfortable they’ve enough money for their retirement and can safely let the loan go.

Gifts play a useful part in Inheritance Tax (IHT) planning. A gift made will fall out of account for IHT on your death, if you survive the gift by 7 years. Release of a loan will be such a gift, but remember that HMRC will only accept the release of a loan by way of a gift if the release is effected by deed.

HMRC’s Inheritance Tax Manual states:

Letters and circumstantial evidence that clearly indicate an intention to absolve the beneficiary of the loan from any liability to repay will not be sufficient to discharge the debt."

And goes on to remind us that a deed must:

  • make it clear that it is intended to be a deed by the parties to it, by describing itself as a deed or otherwise, and
  • be validly executed (usually by signature) by those persons.

So, two simple (and so often overlooked) lessons…

  • If you lend a child money, get them to sign a written acknowledgement; and
  • If you release a child from debt by way of intended gift for IHT planning, make sure the release is effected by formal deed.

About the author

Jim Sawer is a partner in our private client team. He has a broad private client practice which is predominantly tax and trust driven.  For over 30 years, Jim has acted as principal trusted adviser to families in the UK and overseas, including those with commercial and landed interests.

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