We can provide you with detailed Inheritance tax advice including:

• Using non UK domicile status to avoid UK Inheritance tax
• Advice on using trusts to avoid Inheritance tax
• Making full use on the Inheritance tax reliefs such as business property relief, regular gifts out of income and the spouse exemption
• Transferring assets to reduce the size of your estate
• Optimal holding structure for companies etc to reduce inheritance tax

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Sample Inheritance Tax Question

Question

My 71 year old mother has gifting money to my sister and I, on the basis that these will become tax free over 7 years. However, she has asked us to lend her money to pay interest payments on mortgages (which have been used to release equity to gift to us).

Will these PETS be invalidated by the debts to us - irrespective of the 7 year rule. Also will the gifts be caught by the gifts with reservation of benefit rules?

Answer

This is a complex scenario, and I would advise that you take detailed advice. I would think it unlikely that that the reservation of benefit provisions would apply given the difficulty in applying the tracing provisions to gifts of cash.

However, there is specific legislation aimed at preventing individuals using loan back arrangements which is essentially what is happening in your scenario.

This legislation applies to debts incurred or created by the deceased on or after 18 March 1986 that would otherwise be allowable as deductions

The legislation seeks to disallow debts to the extent that the consideration given by the creditor consisted of:

• property derived from the deceased, or
• other consideration given by a person who was at any time entitled to, or whose resources included at any time, property derived from the deceased.

In your case, HMRC would undoubtably look to appy these provisions given that your mother has gifted you money and you have then lent funds back to her.

The debts from your mother to you would then not be allowed as a deduction from her estate.

Any repayments of the debt are treated as PETs at the time they were made.

If there was a double charge to tax eg if you mother did not survive for seven years from the date of the original gift there could be a double charge to inheritance tax (as the cash gift becomes a failed PET and the debt is disallowed). There are then additional provisions to prevent a double charge to IHT.

Where possible, and particularly if there were a number of loans, detailed records should be kept showing the loans made, gifts and any loan repayments. Signed receipts are not necessary as the funds can be traced through the bank accounts, however they would be beneficial and make unravelling the position easier in the future.

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