The difficulty of calling in an unsecured loan on death


Making loans to family members can be risky at the best of times but what happens when one of the parties dies?

As this article points out, if the lender dies the loan doesn't necessarily fall away, unless the lender forgives the loan in their Will. The loan will be an asset of the estate that the beneficiaries of the estate will be entitled to. The executors of the estate are then tasked with the job of trying to call the loan in, which may be difficult enough if it's unsecured, and may be even more difficult if debtor and beneficiaries are all family member.

An added issue is one of inheritance tax (IHT). As an asset of the estate the loan must be valued and IHT may be payable on it. This is where it can get tricky. In considering the value of the debt the executors need to consider how likely it is that the debt will be repaid. Is interest payable? What will the executors have to spend in order to recover the debt? All difficult issues to grapple with and get right so that the right amount of tax is paid.

Executors also need to be mindful of the tax implications of the lender forgiving the loan in their Will. It may no longer be an asset of the estate that needs to be called in but from a tax perspective the lender has made a gift that may the subject to IHT in their estate.  

The executors will also have to pay particular attention to the terms of the clause in the Will that deals with the forgiveness of the debt.  What is it that the lender is forgiving exactly? Is it a specific loan or all loans made to a specific individual? Does it include loans made after the date of the Will? Does the clause deal with what happens to interest on the debt?

These are all issues that the executors will have to deal with whilst navigating their way through a difficult time for all concerned.

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The current 5th Viscount Hambleden, heir to the WH Smith fortune is in a bitter dispute with his step-mother Lesley, Viscountess Hambleden, widow of the late 4th Viscount Hambleden, over unpaid debts owed to the late Viscount's estate. The 5th Viscount, together with the trustees of the 4th Viscount's estate, took legal action against the Viscountess in 2014 over the unpaid debts, with the trustees claiming £1.73 million and interest and the 5th Viscount £150,000 and interest. The 5th Viscount maintains that in the month before his father died, the Viscountess had agreed to sell a property in Carmel, California, where she had lived with the late Viscount, and hand over the proceeds to repay loans owed to him. The property was apparently sold in May 2013 for about £1.8 million but the Viscountess allegedly failed to repay a penny.