Avoiding Gift tax by calling it a loan

B

bigbustour

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Hi

Looking for some advice, My wife's parents who live in the UK very generously want to give us 100k sterling towards the purchase of a house as we have outgrown ours with the kids. They see it as an advance on an inheritance that will be coming her way but obviously the tax man does not. I have read some posts whereby to avoid Gift tax this should be structured as a loan. How do I go about doing this.

> Do I need to draw up formal documents ?
> What would happen on death of her parents if this is a loan?
> Are there any angles to play as this money is coming from the UK such as tax reliefs etc (very optimistic I know)
> Is this the best way to approach this.
> I read that there are posts on this elsewhere on askaboutmoney but have been unable to find them, if anyone cant point me in the right direction that would be great.

All advise gratefully appreciated

Thanks
 
Start here: if it's not a loan, it is fraudulent to tell the taxman that it is one.
 
If they gift it to your wife then it will be under the threshold and no tax would be due, unless she has received gifts already that would bring it over the €250,000 threshold.
 
callybags said:
If they gift it to your wife then it will be under the threshold and no tax would be due, unless she has received gifts already that would bring it over the €250,000 threshold.
Click to expand...

Thanks Callybags, I thought the threshold only applied to inheritance tax following death. Is there a threshold applicable if the donors are alive ? My assumption was it would be gift tax if alive and inheritance tax if dead.
 
Padraigb said:
Start here: if it's not a loan, it is fraudulent to tell the taxman that it is one.
Click to expand...

Thanks Padraigb, I will bear this in mind. The intention would be to structure it properly as a loan and make repayments if needed. I assume we could give favorable rates and terms(years) to the conditions.
 
Gift tax and inheritance tax are the same thing in Ireland. €250k is the lifetime threshold parent to child for either lifetime gifts or inheritances.
 
I think it would be okay to draw up a memorandum where your wife acknowledges receipt of an interest-free loan, and undertakes to make repayments as and when her circumstances permit.

It is probably best if the loan is recorded as having been made jointly by her parents. If it is done that way, should one parent die, the entire debt is due to the surviving parent. Should the second parent die, any balance outstanding is an asset of the estate, and goes into the reckoning for taxes due on the estate or your wife's inheritance. If there are other beneficiaries, such as siblings of your wife, your wife's liability to the estate can affect how much each party inherits. Her parents could avoid this complication (if they wished to) by making a specific provision in their wills forgiving her any debt she owes them at date of death. That would count as part of her inheritance, and be subject to CAT.
 
Hi big bus,

I am a specialist in uk/Irish estate planning.

Are your parents Irish living in the Uk or are you British living in Ireland or some other combination?

There are some considerable complexities around the interaction of UK inheritance tax and Irish CAT depending on the mix of residence, intentions, nationality and other factors but with careful planning it would be possible to structure a tax efficient gift from a UK IHT perspective and a tax efficient transfer from an Irish CAT perspective.

But you potentially need to consider the tax rules on both sides of the Irish Sea. For a gift of this size and depending on the size of the parents estate you could be looking at estate taxes of 30- 40k so you are right to explore your options.
 
Marc said:
Hi big bus,

I am a specialist in uk/Irish estate planning.

Are your parents Irish living in the Uk or are you British living in Ireland or some other combination?

There are some considerable complexities around the interaction of UK inheritance tax and Irish CAT depending on the mix of residence, intentions, nationality and other factors but with careful planning it would be possible to structure a tax efficient gift from a UK IHT perspective and a tax efficient transfer from an Irish CAT perspective.

But you potentially need to consider the tax rules on both sides of the Irish Sea. For a gift of this size and depending on the size of the parents estate you could be looking at estate taxes of 30- 40k so you are right to explore your options.
Click to expand...

Thanks Marc, I'm Irish and my wife is English but living and working here 10 years plus. Her parents who are gifting the money have always lived in UK. Thought this was resolved with the threshold mentioned above. Is that not the case ?
 
The problem is that your wife's parents could leave her a sum of up to €754,000 free from UK inheritance tax with no planning at all.

Unfortunately since she has been living in Ireland for more than 5 years the tax here in Ireland on what in this example should be her tax free inheritance from her UK parents would be around 174,000 euros based on current tax rates.

There is no reason why a UK lawyer would bother to consider any planning for an estate of less than this amount as in the UK it would be tax free.

This is why I say it needs joined up advance planning on both sides of the Irish Sea and in my experience few people fully consider the issues and furthermore there are few advisers who specialize in this area.


Marc Westlake
Registered Trust and Estate Practitioner
Chartered Financial Planner (UK)
Certified Financial Planner (Ireland)
 
Tax in UK is called death duty and is paid by the estate whereas here those inheriting pay tax according to their relationship to the deceased and the accumulation of other such monies in their lifetime. So other inheritances and gifts in previous seven years are included also. I thought that there was some agreement about 'double taxation' so both governments do not get a share of same estate?
 
Hazel,

You are correct that there is a double tax treaty between the uk and Ireland.

Under the terms of the double taxation treaty between the UK and Ireland, tax is based on the following principles; where the property is not situated gives a credit and the jurisdiction where the property is situated taxes.

It should be noted that any UK Inheritance Tax payable is not deductible as a liability in calculating the amount of CAT payable - it can only be used as a credit against CAT in Ireland only when the same property is taxed in both countries.

"Property" in this sense means gift or inheritance.

Another point to note is that gifts made in the UK within the nil rate band are potentially exempt transfers if the settlor survives 7 years from the date of the gift it falls out of the estate for the purposes of Inheritance Tax in the UK.

However all gifts received in Ireland on or after 5th December 1991 are aggregated for the purposes of calculating Capital Acquisitions Tax. This means that a UK settlor can make a gift which subsequently falls out of the UK IHT net and would be exempt but which is still caught by Irish CAT under the aggregation rule.

This is not a problem with a DIY solution.

One further point to note is that the OPs wife also doesn't need to pay tax on her investment capital - one of the benefits of being a Blow-in living in Ireland.
 
Thank you Marc. A complicated business ....what with countries in close proximity and with such movement of peoples down the years yet with different tax codes. I see a need for professional advice!
 
Thanks for all the replies on this. I have been on holidays for a couple of weeks and may come back with a few questions when I get a chance to review the replies.
 
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