Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about whether money transfers to children are gifts or loans.
‘Unfortunately, one of my high net worth clients has been diagnosed with a serious illness and his prospects of long-term survival do not look good.
We have been going through his financial affairs in order to have as clean as possible a situation for his wife and family should the worst happen.
One issue has come to light. He has three adult children and for each of them he has provided (to use a neutral term) substantial amounts of money (£100,000 plus in each case) to help them get on the housing ladder.
I asked him whether these were loans or gifts and he says that that these were all informal arrangements. As the children started to earn substantial income and/or made a profit on selling their houses they would probably have paid back some money to him but nothing was ever fixed.
The distinction matters because if they were gifts then they would be PETS and, at least in some cases, an element of taper would be available and, depending on how long he lives, gifts would fall out of his estate whereas loans would be an asset of his estate.
This sort of informality (though perhaps not the amounts) must be very common in family situations.
What advice can readers give?’ Query 19,973 – Troubled.
Terry Jordan’s reply: Client’s health means it is better for transfers to be categorised as gifts.
‘Troubled is seeking to establish whether transfers of money to his client’s three adult children were gifts or loans.
Such transfers are likely to be more problematic than transfers of chattels where a gift is normally ‘perfected’ by delivery or of land where writing is required by the Law of Property Act 1925, s 52. In general, for a gift to be effective the donor needs to have donative intent, there must be delivery and acceptance by the donees and the subject matter of the gift needs to be certain. Increasingly in my experience clients are concerned about their children’s partners and from that point of view loans may be attractive as asset protection measures.
The state of health of the client means that it is now attractive for the transfers to be categorised as gifts, not loans. Troubled mentions taper relief. That is only of benefit when lifetime gifts exceed the nil rate band as it is the inheritance tax that tapers not the capital sum gifted and available nil rate band(s) will be set first against failed lifetime gifts.
Assuming there is no evidence that the transfers were loans the presumption of advancement may help. In Wood v Watkin [2019] EWHC 1311 (Ch) the High Court held that a presumption of advancement could arise even where the donee was an adult child of the donor and financially independent of their parent and in Kelly v Kelly [2020] 3 WLUK 94, the High Court held that the presumption of advancement was not rebutted where there was no documentary evidence that a father’s purchase of a property for his son was a loan and not a gift.
Nowadays mortgagees will require confirmation from parents that money from the bank of mum and dad is being gifted, not lent, so that their security is not compromised.
Where loans have been made and it is later wished to turn them into gifts it will normally be necessary to execute a deed, a mere letter will not suffice to waive the debt. This is a point HMRC does take relying on the case of Pinnel (1602) 5 Co Rep 117a, see IHTM 19110.
Perhaps Polonius should have the last word:
“Neither a borrower nor a lender be,
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.”‘
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