Will loan repayment necessarily incur inheritance tax?

[financialmuddle]

I lent my sister and her DH £26K as a sort of bridging loan that they needed to buy a house in 2006. It was money I had unexpectedly inherited. It was meant to be temporary loan, which my mum would pay back on my sister’s behalf, but she then decided not to do this so the loan to my sister became longterm. I eventually asked for it back in 2022, and they paid the exact amount I had lent.

We had never discussed inflation. I expect people will find this incredibly ignorant, which it is, but I didn’t realise that inflation is cumulative. I thought the inflation would be say, 2 or 3% of £26K, and felt it was easier to take that loss than to ask them and potentially fall out over less than £1000. They had said that they were offsetting it against their mortgage.

Recently I belatedly realised how inflation works, and that I have ‘lost’ more like £13,000 in inflation over this time.

My mum now says that she would be prepared to make up this loss, but she has recently had some advice over her will, and was told that she will pay inheritance tax.

Is there any way she could pay me this £13000 as repaying inflation on the loan, on behalf of my sister, rather than it showing as a gift which would be taxed?

There is nothing in writing, except for texts about repayment.

Now that I write it out that sounds rather unlikely. What a mess.

As long as she lives 7 years she can pass it on IHT free, there are annual allowances for gifts and no limit of paid for
from income rather than savings.

As I understand it a person can give gifts of £3k per year which do not count towards Inheritance tax. Other smaller gifts can also be given.

Your Mum could give you £13k making it clear 3k is her 2023/24 tax year gift allowance and £3k is her 2024/25 tax year gift allowance. That reduces the IHT gift to £7k. As a pp said if your Mum lives 7 years then there is no IHT to pay.

I would also point out IHT comes from the estate not the recipient of the gift.

Thanks. She is elderly and I think it is unlikely that she would live a further seven years.

She has used her gift allowances already for my sister.

Sorry to hear that.

Re-reading your op again your Mum and Sister bought a house together and you loaned £26k. So your Mum benefitted from the loan. The loan was repaid but with no interest. The £13k is the interest. I would get your Mum to write a letter confirming the £13k is the interest on the loan she benefitted from. That is the truth so it isn’t a gift.

It wasn't a shared house purchase, @Harassedevictee. My mum just contributed to my sister's house purchase. So I don't think my mum benefited?

Your mum would never have to pay inheritance tax. As beneficiary you may if her estate is worth over the threshold.
The simple thing to do, assuming you don't need the money now, is that she leaves an extra amount in her will to you. If IHT is payable then it's paid on rhe entire estate and you get an extra £13k when IHT has been paid
I think though you have to take some responsibility for not actually organising any paperwork or dealing with this loan properly at the time. It's very nice of your mum to see you right but also I don't personally think I'd have insisted on being made "whole" when I'd not actually done any proper paperwork etc at the time

I have taken responsibility, and I haven't "insisted" on anything, @Whyherewego.

OK, sorry I can’t think of anything else.

Is your mum’s estate likely to be over the inheritance tax limit?

@eurochick In the op, the mum has had advice saying she will pay IHT. Assume this takes account of any spouse allowance. This puts the limit up to £1m. The IHT on this sum tapers too. The nearer it gets to 7 years, the less IHT is payable. Frankly if her estate is paying IHT she has left estate planning very late. You do need to plan earlier than this but if there’s loads of money, it’s hardly going to be a big deal. Or just get mum to buy something you need.