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Q&A: Inheritance tax and debts

 

Julia Rosenbloom, head of private client tax services at the Birmingham office of Smith & Williamson, the accountancy, investment management and tax group, says that generally, where a borrower repays a loan, the lender does not have to pay any tax as the loan repayment is not treated as income in the hands of the lender. The exception to this would be that if interest is payable on the loan, income tax may be payable on the interest element.

So, in a simple case where a parent repays the loan during her lifetime, the lender would not have to pay any tax. Broadly speaking, the same applies on death. I am assuming that the lender in this case will inherit his mother's house on her death. On the basis that she has no other assets and the house is worth £1m, the £45,000 debt will first be deemed to be repaid from the value of the house. In other words, £45,000 worth of the house repays the debt and the remaining £955,000 is received as an inheritance. Consequently, while the son can continue to rent out the house, the debt will no longer exist at that point and the rental income received on the house will be subject to income tax in his hands.

The good news is that the £45,000 will be deductible for inheritance tax purposes in the mother's estate. Instead of basing the inheritance tax liability on a property worth £1m, it will only be chargeable on the £955,000 value (ie £1m minus the debt of £45,000). Based on a 40 per cent rate of inheritance tax, this would produce a saving of £18,000.

 

WHAT DOES ACTING AS AN ATTORNEY INVOLVE?

I have been asked by an elderly relative to be her attorney in financial matters and also to be the executor of her estate. She has three grown-up children who all live abroad and have agreed to this plan. A colleague in work has power of attorney for his parents and he seems to spend all his time having to file records and justify his expenditure and decisions, which puts me off. I am also unsure what my role as executor will entail.

D Johnson

 

Your work colleague is almost certainly what's properly called a deputy rather than an attorney. This is where power of attorney has been requested after the person requiring it lacks the mental capacity to agree to it. In these cases the Office of the Public Guardian and the Court of Protection will authorise a deputy to make decisions for the person. Unlike an attorney, deputies must keep accounts and follow strict rules on expenses, and transactions have to be recorded and submitted in an annual report. Deputies must also keep copies of bank statements, contracts for services or tradespeople, all receipts and all letters and emails about their activities as a deputy. If your relative has the capacity to agree to you looking after her affairs on her behalf, then you will have full power of attorney and will not be under the supervision of the Office of the Public Guardian. However it might be wise to follow the deputy rules above in case you ever need to satisfy her children that you are looking after her affairs properly.

The executor's role involves dealing with the estate of a person who has died. Tasks include gathering information about the assets - and debts - in the estate, and finding all the surviving relatives. You will need to arrange valuations and complete a probate application form (PA1) and if relevant the inheritance tax form. You can call in a solicitor to help you with the process of valuations and working out the tax due, and how it is going to be paid. Inheritance tax normally has to be paid by the end of the sixth month after the death, whether or not all the forms have been completed and submitted, and it has to be paid on the valuation of the assets, including property, at the time of the owner's death, not the value when it is sold. IHT would normally be paid from cash in the estate, cash raised from family members or using a bank loan. Until the inheritance tax position has been resolved, probate will not usually be granted. Probate means you can then distribute and sell assets.