Inheritance tax gift or loan help

[Ihtquery]

Sorry this is long.

My Dad has very very kindly paid off my mortgage but I am unsure about advice they've been given by their financial advisor regarding inheritance tax.

I don't think the IFA will know as much as a solicitor on this and after I did a Google I am a bit concerned.

Basically, I know that if Dad does within 7 years then if it is a gift it will go back into the estate and there may well be IHT to pay.

Dad has been advised to make this a loan and he has written a letter for me to sign to say I don't have to pay it back but it is a loan. They think this makes it excluded from IHT. From my googling, I don't think it does. (I haven't asked them to do this at all btw..any of it).

From what I understand, it would either be regarded as a legitimate loan in which case it is owed to the estate on his death unless the letter clearly states it is written off when he dies. Then it would just be regarded as a gift anyway, particularly if it's a loan from family with no repayment plan

I don't see any benefit to me for this to be a loan. I don't think it gets around any IHT implications and could just make things more complicated?

There's certainly no intention for me to pay it back by Dad and he thinks he's doing it to benefit me and get out of IHT liability if he does die within 7 years.

Does anyone know about this ?

Also, he said if I did end up owing IHT, he thinks if it is a gift then I would owe it from my half of the inheritance (not my sister). But again, I think this is wrong. Wouldn't it just go back into the estate. It wouldn't be me personally owing the tax. It's be the estate and then whatever is left after IHT would be divided between me and sis?

I hate all this stuff. It was an incredibly kind thing to do (done because I may not be able to carry on working to 67 due to health issues) so he's trying to look after me now. I'm just nervous that this is just going to cause stress later.

He hasn't done his will yet either and needs to do this.

I know that IHT is on a sliding scale after a gift. This list is from the Government web site
Years between gift and death Rate of tax on the gift
1 to 3 years 40%
3 to 4 years 32%
4 to 5 years 24%
5 to 6 years 16%
6 to 7 years 8%
7 or more 0%

I suspect the intention is that, it is a loan for an indefinite period, with no repayment schedule and that if the some or all of the loan is outstanding when your father dies it will be written off, the idea being that if you won the lottery you would repay it. Personally I wouldn't worry now, get your father to make a will and hope he stays alive for 7 years. You are sort of correct that the IHT of gifts is paid from the estate, the problem arises when the estate doen't have enough money to pay the IHT, then it has to be paid by the whoever received the gift, for example if I gave away £10m, keeping £3m for myself, if I died within 3 years my estate wouldn't have enough money to pay all the IHT. My advice would be to try and save at least some of the money you were paying for your mortgage, to boost your pension, remember pension contributions get tax relief and you can start drawing a personal pension before the state pension kicks in.

here is what the government says. Gifts do not go back into the estate. Loans do. https://www.gov.uk/inheritance-tax/gifts
https://www.se-solicitors.co.uk/repayment-of-loans-from-a-relative-when-they-die/

I think that your father can write in his will that the loan or any outstanding part of it (or any loan) he has made can be written off on his death but all that does is puts the outstanding amount of the loan back into the estate (same as a gift) and the 7 year rule applies.

From what I know (I am not a legal beagle) you are right and the IFA is wrong. I have no idea why they would have given that advice.

I think the letter would make matters more complicated a loan is just that it is supposed to be paid back. If he hasn’t made a will then it seems right to encourage him to sort his affairs now. Out of interest if he did die within 7 years who would know he has gifted you money whilst alive.

"Dad has been advised to make this a loan and he has written a letter for me to sign to say I don't have to pay it back but it is a loan."

That doesn't really make sense at all. A loan is made with the expectation that it will be paid back.

"They think this makes it excluded from IHT. From my googling, I don't think it does."

You are correct, it does not. Any outstanding loans at the time of death are still owed to the estate.

"I don't see any benefit to me for this to be a loan. I don't think it gets around any IHT implications and could just make things more complicated?"

I agree. What they may be thinking of is to give you a loan which you then don't need to repay, so in that case it becomes a gift. There is no benefit (that I am aware of) from making a loan and then turning it into a gift rather than just making a gift.

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"...unless the letter clearly states it is written off when he dies."

That won't necessarily be enough for HMRC.

It is not unknown for parents to lend money to their children at some point and then later on decide not to ask for repayment any more - in other words to 'waive' the repayment of the loan and turn it into a gift.

The problem with this is that unless the waiver is done properly then the loan is still a loan (and part of the estate after death) and not a gift.

There are some quite strict rules that have to be followed to convert a loan to your children into a gift.

HMRC will not recognise a parent turning a loan into a gift unless it is documented by way of a deed. It doesn't matter if the original loan was just documented in an email or simply a handshake and not put in writing at all.

The “deed of waiver” must clearly declare itself as such and be properly executed as a deed (so it must say that it is a deed of waiver and both parites have signed it).

To waive a loan, a mere letter, email, or informal note (even one clearly stating an intention to forgive the debt) is insufficient for inheritance tax purposes. It will not start the seven year clock for gifting purposes.

HMRC have guidance on this issue here:

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm19110

There really is no reason to do this at all.

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"Also, he said if I did end up owing IHT, he thinks if it is a gift then I would owe it from my half of the inheritance (not my sister). But again, I think this is wrong. Wouldn't it just go back into the estate. It wouldn't be me personally owing the tax. It's be the estate and then whatever is left after IHT would be divided between me and sis?"

This is where things get more complicated. It all depends on your father's personal circumstances.

Any gifts that your father makes in the seven years before death (apart from some small or regular payments) are referred to as Potentially Exempt Transfers (PETs) as they only become exempt from inheritance tax (IHT) after seven years.

"Wouldn't it just go back into the estate. It wouldn't be me personally owing the tax. It's be the estate and then whatever is left after IHT would be divided between me and sis?"

It depends.

If your father is divorced/never married then he can leave up to £500,000 without there being IHT. If he is a widower (ie your mother has already passed away and they were married at the time) then he can leave up to £1 million.

You only need to worry about PETs if the estate is likely to be subject to IHT.

If your father is divorced/never married then he can give gifts up to £325,000 in the seven years before death and you as a recipient do not need to worry about it.

So, for example, he gives you and your sister £100,000 each and then dies within seven years. Each of these gifts is a 'PET'.

These will then be called 'Failed PETs' as he didn't live for seven years. Since the total amount of failed PETs is less than £325,000 (or £650k if he was a widower) then the gifts are treated for IHT purposes as though they still belong to the estate and so the executors will have £200k less nil-rate band when calculating IHT due.

For example, suppose your father gave you and your sister £100k each and had a house and other possessions valued at £500k.

If he died more than seven years after the gifts then his estate is £500k and there is no IHT to pay.

If he died less than seven years later then the £200k of gifts are taken out of the nil-rate band and so the estate has to pay IHT on anything above £300k (£125k remaining of the nil-rate band and £175k of the Residence Nil Rate Band) - so the executors must pay £80k in IHT.

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"... if it is a gift then I would owe it from my half of the inheritance (not my sister)."

Things change if the gifts are more than £325,000.

If your father leaves gifts worth more than £325k that fail then it starts getting much more complicated.

If you receive a gift worth more than £325k (or £650k if your father is a widower), or if gifts worth more than £325k in total have been made, in the seven years prior to death then you become primarily responsible for paying any IHT due on the gift.

It is only if the IHT is still outstanding after 12 months that the estate also becomes jointly liable. See sections 199 and 204(8), Inheritance Tax Act 1984.

"... if it is a gift then I would owe it from my half of the inheritance (not my sister)."

This would only apply if your gift were greater than £325k (or £650k depending) or your sister had received a gift before you and the total value of both gifts was above £325k.

This can be difficult to understand, so here is an example.

A divorced father has five children. He dies in 2026 but in the seven years prior to that he gave various gifts to his children:

• 2019 A gets 100,000
• 2020 B gets 100,000
• 2021 C gets 100,000
• 2022 D gets 100,000
• 2023 E gets 100,000

Now, the first £325,000 is exempt so A, B and C don't have to pay any tax.

Since A, B and C have used up £300,000 between them, D only gets £25,000 tax free and has to pay tax on the remaining £75,000. But, because it is between 3 and 4 years ago they pay a reduced rate of 32%.

Poor old E, being the last to the party has to pay tax on their full £100,000 gift.
Hope that makes sense?

The recipient of a gift is primarily responsible for paying the tax. Now, if D and E refuse to pay the tax (which they might do) then at the end of the day, it is the estate of the deceased that is responsible for paying the tax and would have to pay it.

They would then need to bring a court case against the beneficiaries to recover the IHT that had been paid out.

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So, TL;DR - I agree with you

"Out of interest if he did die within 7 years who would know he has gifted you money whilst alive."

That's a fair point. It is the duty of the executors to make all reasonably necessary enquiries and if the person who got the gift doesn't tell the executors then they may face a fine. Although HMRC will also wade in if they get a tip-off.

If any gifts haven't been disclosed, and they don't appear in any bank statements readily to hand, then it is quite likely that they might be overlooked.

However, it probably does depend on the amount.

I recall that there was a case from a few years ago, back in 2015, Hutchings v Revenue & Customs [2015] UKFTT 9 (TC).

Mr Hutchings died in 2009 and his executors wrote to each member of the family asking if they had received any gifts from him in the previous seven years. Only one daughter replied saying that she was not aware of anything.

The executors filed the inheritance tax account on that basis and arranged for the inheritance tax to be paid. Nearly two years later, HMRC received a tip-off that one of the sons had received a substantial cash gift from Mr Hutchings.

HMRC wrote to the son demanding disclosure of the gift. It turned out that the gift was about £450,000 cash held in an offshore Swiss bank account. HMRC claimed an additional £47,000 of tax from the son personally, and, in addition, claimed a penalty from him of £87,000.

The son paid the tax but appealed against the penalty. Amongst other things, he claimed that his father's executors had not made it clear to him that he should declare the gift and that they should, as a result, be liable to pay the tax themselves. The Court found against the son, saying that he had deliberately withheld information about the gift from his father's executors.

Thank you @Another2Cats . There's a lot to take in there. I'm going to need to chat to Dad I think but he won't want to think the IFA is wrong. I just don't think the IFA is expert enough unfortunately.

Sorry yes, there was a lot there. The problem is that it all depends on the particular circumstances of your family.

But, to put it perhaps more simply:

1 A loan remains a loan until it is forgiven or waived by you and your dad signing a 'deed of waiver'. At that point in time it becomes a gift.

2 You only need to worry about gifts if your dad's estate will be subject to IHT and he gives gifts of more than £325k (or £650k if he's a widower).

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"I just don't think the IFA is expert enough unfortunately."

There is a body called 'The Society of Trust and Estate Practitioners' (or STEP for short). Members of this body have a lot of experience with dealing with these sorts of issues.

It is mostly solicitors who are members, but there are also IFAs who are members.

I would suggest that you speak to an IFA who is a member of STEP.

You can have a look on their website. Put in your nearest town or city and it will come up with a list of members in your city.

https://www.step.org/directory/members

Alternatively, you can google something like "Society of Trust and Estate Practitioners Independent Financial Advisor [name of your town]"

Just as an example, I live in a city of around 200,000 people. When I looked, there were eight solicitors and five IFAs or other people such as accountants etc in the city who were members of STEP.

He should give the money. If it’s a loan, there’s an assumption it can come back into his estate and IHT will be payable. You are correct - he should give it and we have had that clear advice from our financial advisers. I would kindly suggest your Dads are not good enough. He should document what he’s given and make it clear it’s a gift and he has no further interest in the money. A loan clearly infers he does. So chat to him. He doesn’t want the money back, so give it, document it, and live for 7 years. We’ve just done our first 7 years! Gift fully gifted and out of our estate for IHT purposes.

You absolutely don’t need any firm to tell you this. It’s very straightforward.

The only person in your post making sense is yourself OP.
You can't get around IHT if his estate is large enough and he dies within 7 years of giving you a larger chunk of cash.

He really must make a will, especially because if his estate is large enough for IHT he needs to make proper plans for when he goes.

Could you possibly answer these questions, @Ihtquery ?

How much in total is he giving to pay off both your mortgages?

Is he a widower?

Does he own his house?

At this point do you think that his estate (including what he's given you) would be over £500k (if divorced) or £1m (if widowed)?

That information will give us an idea as to whether inheritance tax will be an issue at all

My sister already paid off her mortgage with some help several years ago.

Mine was about £50k.

Yes a widower and yes owns his house which is probably worth about £500k. I don't know what's he's worth exactly but I think a million is a possibility yes though doubt it would be much in excess of 1 million. Could be less and who knows with any possibility of care needs in future.

I'm incredibly grateful for the help. I'm not worried about paying IHT only that I don't want it to be more complicated than it needs to be or to end up with any issues because of wrong advice.

I think HE is worried about having to pay IHT. I think I'm the odd one out in the family. I think the rest of my family are more against it! Funnily enough out of them all ..I am the poorest!

I would only be worried about how it works to pay any bill because you only get 6 months don't you? I don't quite know how it all works with probate and selling the house. Hoping it will be a good while yet but of course one never knows.

He does know he needs to sort his will out. And POA just in case. Can't believe he's not done it already to be honest!

Thank you all for the advice. I will pick my moment to talk about it. I don't want to sound like I'm criticising the IFA as he's been with Dad for years and has been good in many ways. I would hate to offend my father.

This may sound silly but could you couch it like doctors and dentists? Dentists know a little of medicine in order to be able deal with mouth infections or to spot an oral cancer and so on but they are not doctors. Doctors overlap with stuff like oral cancer, oral thrush but they can't remove or fill a tooth. IFA's know loads about investment and so on but only tangentially about wills and IHT management. Solicitors may know a very little about pension planning and investment but are where to go to get good solid advice about wills and legacies. No matter how experienced and expert the dentist is, they are not a doctor and vice versa.

@Ihtquery There’s a strong chance he’s been told to offload some money to get under £1 million so his estate is IHT exempt. It’s not rude to discuss with him what the rules are and that it must be a documented gift. Not a loan. You don’t need solicitors or anyone else involved. If he truly doesn’t want the money back, he can surely give it? I cannot stress strongly enough to get POA and a will done. It matters.

Thanks @MeetMeOnTheCorner , yes we do know he needs to do the will and poa. Family politics have been tricky and he's been struggling since Mum died, but he will get it done.

I don't actually think he has been told to offload money. He's mentioned this 'helping me' for quite some time but the IFA was saying not to do so a while ago or at least giving downsides. Daft really because if he'd done it sooner, it would be even less likely that IHT will be an issue as we do hope he'll still be around in 7 years. He's 80 but pretty healthy right now. You just don't know though.

Mid life is hard isn't it, navigating this stuff!

@godmum56 that solicitor link was v interesting.

"Do I have to repay a loan made to me now that the Lender has died?

If you have received a loan from a relative during their lifetime, when that person dies, the loan must be repaid. If you, the borrower, are entitled to a share of the Estate in any event – perhaps you are the deceased’s child – you will receive your share of the Estate after deducting the amount of the loan. If the loan amount is more than you are due, you will need to repay the balance."

So as long as Dad is able to leave me in excess of £50k, then I don't have to repay and it wouldn't work like a gift for IHT. I wonder if IFA is right then but god it seems a bit riskier for me.

If he says it's written off on death then it becomes a gift but not sure the date from when that would work and then it's pointless as a gift.

If not written off, it goes back into the estate and is deducted from my share of the inheritance but assuming that there is more than that in my share left.

"So as long as Dad is able to leave me in excess of £50k, then I don't have to repay and it wouldn't work like a gift for IHT. "

No, the last bit is a mistake.

Probably easiest to explain with an example.

Your dad makes a loan to you of £50k. The rest of the estate is worth £450k and his will leaves it to you and your sister equally.

Your father passes away and his estate then consists of £450k plus his loan to you of £50k making a total of £500k.

The will says that you and your sister share equally, so you both get £250k.

Since your loan is an asset of the estate then the easiest thing to do is to forgive the loan and take it out of your share of the estate. So you would get £200k and have the loan written off and your sister would get £250k.

Where you say:

"...it goes back into the estate and is deducted from my share of the inheritance but assuming that there is more than that in my share left."

This is correct.

"If he says it's written off on death then it becomes a gift but not sure the date from when that would work and then it's pointless as a gift."

It would become a gift on the date of his death. In your situation (as a beneficiary of the will) then, yes, it is pointless to do this.

But there are certain situations, for example, if the person who has received the loan is not going to inherit (and so will have to pay back the money) where a person may decide to turn a loan into a gift.

Thank you @Another2Cats . That's so helpful.

So then it makes sense as things stand perhaps after all and I now understand the loan thing.

It is making it fairer to my sister (on paper anyway, she's had help elsewhere though but that's a silly grumble.... just wish I didn't know! )

The only worry is if things change. If Dad ended up funding care costs and depleted what he has just now to the point that I would have to repay the loan which I know I won't be able to.

Has your dad made any gifts already?

the £50k will be covered by his nil rate band of £325k and that will mean no tax on you, but there will be £50k less to deduct from the estate. Is your dad a widower?

A loan makes no sense.

"It is making it fairer to my sister (on paper anyway, she's had help elsewhere though but that's a silly grumble.... just wish I didn't know! )"

I notice that you said earlier:

"My sister already paid off her mortgage with some help several years ago."

Was this "help" from your father? Was it of a similar amount (or more) as your £50k?

"It is making it fairer to my sister (on paper anyway, she's had help elsewhere though but that's a silly grumble.... just wish I didn't know! )"

Is it really though? She's had help already with paying off her mortgage?

I have no idea at all about your family dynamics and totally understand that this might be exactly the sort of issue that you cannot bring up with your dad (I speak from personal experience here).

If you are able to speak to your dad about what sort of financial support that your sister received, then it would probably be a good idea to ask him on what basis he provided the money to your sister, and ask that he provide you the £50k on a similar basis.

In other words, if it was a loan to your sister then make it a loan to you as well. If it was a gift to your sister then you would like it to be a gift to yourself as well.

But I totally understand that these are conversations that are really difficult to have with a parent. For example, my father gave several tens of thousands to my sibling while he (my father) was alive, I never received a penny. I only found out about this near the end of my father's life. In his will, he still gave more to my sibling than he did to me.

So, perhaps think about how you might want to put any communication with your dad when saying that you can't accept it as a loan but only as a gift - especially when you know that he has already provided help to your sister.

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Sorry, that got rather deep.

"The only worry is if things change. If Dad ended up funding care costs and depleted what he has just now to the point that I would have to repay the loan which I know I won't be able to."

Technically speaking, this is possible. But I would say that it is very unlikely.

Very few men go into care homes (compared to women) and, for those in their 80s, their life expectancy is around three years in a care home [Source: ONS Life expectancy in care homes, England and Wales: 2021 to 2022].

Other studies have shown that for men who are diagnosed with dementia in their 80s, they typically only spend around eight months in a care home [BMJ 2025 388: Time to nursing home admission and death in people with dementia: systematic review and meta-analysis].

Typical care home fees are around £70k per year (but higher for those with dementia) so, typically, if your father did go in to care then he might be looking at around £250k in care home fees on average.

Wow. You have some sort of brain @Another2Cats ! Thanks!

It's all a bit complicated. I have had some bits and bobs too many years ago but as the sibling who has had to live further away for various reasons, I've not had any practical help or loans or small amounts that has helped my sister, who is also in a stable relationship, become financially secure. She is much more well off than me. She had childcare help from my parents and other support.

It's just been different. I don't think anything is grossly unfair financially speaking, just the usual favouritism/family politics! My need is greater, support less, and my life has been harder! But that's life, I guess. Who said life was fair? : - )

I don't think he would mind it being a gift as such. He has no intention of me paying it back. It's more than he trusts the IFA and would go along with his advice I think.

I'm sorry for your situation. It's hurtful and v common. I'm ok. I am very good at acceptance for various reasons in my life!

So... If I am wrapping my head around this....

Loan = better for my sibling, Dad will feel it's fairer, small risk to me that I have to pay back if all his money disappears before he passes away! It goes back into the estate so it isn't reducing the possibility of IHT due if adding it back in brings it back over the threshold.?

Gift = no risk for me. If he dies within 7 years, it is considered part of the pot on a sliding scale and there could be some IHT due?

I think I am too tired to grasp this fully! I thought I 'got it ' earlier but the nil band business is confusing me! Thank you @Kouklamo ..I haven't quite understood that I'm afraid.

Thanks everyone for input so far. I do find this way of thinking and analysing quite fascinating.... Not a lawyer or anything remotely similar myself, but I do find it interesting if a bit stressful! It's like solving a riddle!

@Ihtquery Paying a gift back just won’t happen if he’s got enough in savings and house for fees and lives 7 years. It’s not even 1 year of care fees and this might never be what he has to do anyway. To make a judgement on this - what is DF worth? What would depleted funds look like? How long to get to that? Few penniless people have a IFA. Is this £50,000 gift still leaving him with £1 million?

Nil rate band is the inheritance tax free amount everyone gets of £325k. It gets applied to gifts in the 7 years before death first and then the estate.

If your mum and dad were married and she left everything to him he will get her £325k too totaling £650k

there is also an extra allowance of £175k each if his estate is under £2 million and he is giving his main residence to his children after his death.

The point being is that it seems highly unlikely you would pay IHT if the gift failed as it would be covered by the nil rate band available.

I would honestly tell your dad to get proper tax advice not rely on an IFA as they often are not experts at tax planning and the peace of mind to get this right will be worth the fee of a tax advisor who can make sure it’s all set up right.