Tax implications of repaying £90,000 to a son: loan vs gift

A homeowner who received about £90,000 from her son to help cover living costs after a relationship breakdown is considering repaying the loan now that she has sold her home. Financial advisers say the tax implications depend on whether the money was initially a loan or a gift, and on how clearly the arrangement was documented.

Sean McCann, a chartered financial planner at NFU Mutual, emphasizes that the starting point is to determine whether the funds were provided as a loan with an expectation of repayment or as a gift. Ideally, there would have been a written agreement outlining the intentions of both parties. If the money was a loan, repaying the principal would not trigger a tax liability for the son; any interest charged would need to be declared as income by him. From an inheritance tax perspective, while the loan remains outstanding, it would normally be deducted from the donor's estate for IHT purposes, but it would still be counted in the son's estate for IHT.

If the son waived the loan, that would be considered a gift for IHT purposes from the date of waiver. If he survives seven years from then, the gift would be free of IHT on his death; the waived amount would, however, be included in the donor's IHT calculation.

If the payments were gifts, the son may have used the annual exemption of up to £3,000 per tax year and the 'gifts from normal expenditure' exemption, which allows gifts from income provided it does not affect his standard of living. In addition, the rule that allows gifts to provide for a dependent relative's care or maintenance could apply in some cases. Any amount not covered by exemptions would continue to be included in the son's IHT calculation for seven years after the gift. By gifting the money back to him, the donor could increase his potential IHT liability.

The best course of action depends on both the donor’s and the recipient’s circumstances, particularly from an inheritance tax perspective and on whether the payments were loans or gifts. It is important to take advice before making a decision.

Sarah Arora, independent financial planner at Flying Colours, notes that the key is to establish whether a loan or a gift was intended and to create a clear paper trail. If the repayment is strictly a loan repayment, transferring funds directly from the donor’s bank account to the son’s with a clear reference such as 'loan repayment' keeps the matter straightforward from a tax perspective.

If the money was originally a gift, repaying it would be treated as a gift again, which carries its own inheritance tax implications as a potentially exempt transfer (PET). To reduce future disputes or HMRC queries, she suggests documenting the exact amount provided, clarifying whether it was a loan, and noting that repayment is being made. When transferring funds, a clear reference helps ensure the transaction is understood in tax terms. Advisers also remind readers to consider whether the son is UK-resident and domiciled, as cross-border rules could apply, and to weigh whether a large transfer could affect his own financial planning.

Across the board, experts caution that there is no one-size-fits-all answer. The optimal path depends on the specific tax positions of both parties and the thoroughness of the documentation surrounding the original payments and the repayment. Readers facing this decision should consult a financial planner to map out the precise income tax and inheritance tax consequences for both sides, rather than acting on instinct or incomplete information. This is Money notes that while its published guidance reflects typical scenarios, it does not constitute regulated financial advice and individual circumstances vary considerably.