There is a saying that you shouldn’t loan money to your friends, and there are times when this could be extended to loaning money to your family. What happens to that loan after you pass away?
If significant amounts of money are being loaned, and the expectation is that the money will be repaid, it is important to ensure that this is documented in writing. With no paper trail, it is possible that it could be claimed that, instead of a loan, the money was intended as a “gift” that does not need to be paid back. If the person who made the loan has passed away, it could be difficult to prove that it was not a gift.
Of course, this can lead to bad feeling within the family, if it was a family loan, or amongst friends who could be close to other members of the family of the deceased.
It is possible to make provision for a loan to be forgiven through the lender’s Will, if it is the intention that this should be turned into a gift after they pass away if it hasn’t been fully repaid.
Recently, we have dealt with an estate where X passed away, having taken out an equity release mortgage over her property to make a loan to a family member. Other people in the family recalled something about X making the loan, but they had nothing to go on but a rumour within the family.
Had X ensured that the loan was documented, there would have been a greater chance of recovering this for the estate. Instead, the estate had the debt from the mortgage over the property.
Conversely, a deceased family member or friend who was the recipient of a loan without any documentation can have issues in their estates as well, particularly when the beneficiaries knew about the loan and wish to pay it back. In Z’s estate, a family member loaned a significant amount of money, and because there was no documentation of the loan, H M Revenue & Customs was unwilling to treat this as a liability of the estate.
Not only did Z’s beneficiaries pay back the loan, but they had the burden of paying Inheritance Tax on the sum loaned as well. The Revenue treated it as a gift.
If you are considering making a loan to family members, you should seek legal advice and discuss ways of protecting the value in your estate. This can be by a Loan Agreement or some other form of documentation. Not only will this serve as proof of the loan, but an express agreement can be put in place either to state that the loan is interest free and repayable on demand, or even to index-link the loan to protect the value against inflation.