Published on: 6th January 2020

The Bank of Mum and Dad

It seems that the "Bank of Mum and Dad" is now the eleventh largest mortgage lender in the UK with £7 billion being loaned to children each year. Often these family loans are interest free and not documented. So, what happens when the parents pass away? Well things can get rather difficult.

Let us say that in 2012 Mum and Dad lent their son John £100,000 as a deposit on a property. Nothing was documented because it was a family arrangement. Mum and Dad had another child Mary who married a man who already owned a house, so Mary never approached Mum and Dad for a loan. Mum and Dad died before John paid back the loan. John and Mary as executors to the estate had to decide whether the loan was really a loan or whether it was a gift. It was at this time that John and Mary found out about the "Presumption of Advancement".

The presumption is, in effect, that unless there is evidence to the contrary a transfer from father to child is a gift and not a loan. When Mum and Dad died their total estate was £950,000 which meant there was no inheritance tax (IHT) to pay. They had told friends and family that they had managed their estate carefully so no IHT was due. Whatever the decision regarding the £100,000 there would be a upsetting (and unwitting) consequence. If it was decided that the £100,000 was a loan then the executors would need to call in the loan and add the value to the estate triggering an IHT liability of £40,000. If it was decided that the £100k was a gift then John would have received £100,000 more than Mary which is not what Mum and Dad intended. Best advice is to make a decision about whether the transfer is a loan or a gift and record it in writing at the time. If it is a gift then this can be "balanced up" with a gift (in this case of £100,000 to Mary) in the Wills of Mum and Dad. The most important thing in cases such as this is to take professional advice.

If you would like to meet one of our Consultants and discuss any of the issues raised in this article or any other Estate Planning topic, please telephone 01732 868190 or click here.

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