A family loan – forgiven, but may not be forgotten – Published by Taxation magazine 3 June 2026

The article has been published by Taxation magazine on 3 June 2026. The link to the article is A family loan – forgiven, but may not be forgotten | Taxation

A parent may lend money to a child and later decide that the child does not need to repay it. Within the family, that may feel like the end of the matter.

For tax and estate planning purposes, that is not always the case. The key question is whether the loan existed and, if so, whether it has actually been released in a legally effective manner. If it has not, the debt may still be an asset of the parent and may, therefore, still form part of the parent’s death estate.

The potential consequences may have a bearing on multiple aspects, such as the parent’s Will and estate planning, the executors, other beneficiaries of the deceased’s estate, care fees planning and family disputes.

This article assumes that the loan and any release are governed by the law of England and Wales. Different rules may apply in Scotland, Northern Ireland or where another governing law applies.

Releasing a loan in an informal manner

A parent may verbally tell the child that “you do not need to pay it back”, but there may be no follow-up action to ensure that the release is documented or reflected in the parent’s estate planning or Will provisions.

Another typical scenario would be that a parent chooses to “forget it” by simply not demanding repayment of the loan, assuming that this is sufficient because, after all, it is a family matter.

For England and Wales, a simple promise to release a debt is generally not effective unless it is supported by consideration (something of value given in return) or executed by deed. This is not a pure legal point because it could give rise to both tax and non-tax consequences.

HMRC’s published guidance is consistent with that legal analysis: where a loan has been waived by the lender so that the lender’s estate is reduced for IHT purposes, the waiver must be effected by deed. Letters and circumstantial evidence may show an intention to forgive the debt, but they are not usually enough.

The deed should identify the lender, borrower, original loan, amount released, whether any interest is also released, and the date of release. The parent’s Will and any letter of wishes should then be checked so that they reflect the loan release accordingly.

The rest of this article discusses typical tax and non-tax consequences where a family loan has been released informally, or where the evidence of release is not clear.

The IHT 7-year clock

Both the parent and child may think that the value of the ‘released’ loan avoids IHT on the parent’s death, provided that the parent survives the lifetime gift for 7 years. However, if the debt has not been released in a manner that is legally effective, there is no lifetime transfer of value by the parent. This means that the 7-year clock has not started because the value of the parent’s estate has not been reduced by the informal release of the debt.

If the loan is validly released during the parent’s lifetime, the release is normally a transfer of value for IHT purposes. Where the borrower is an individual, there is usually a potentially exempt transfer. The 7-year clock then starts ticking from the date of the effective release, not the earlier date on which the parent first said that repayment would not be required.

One possible upside: avoiding the 14-year PET shadow

An ineffective informal release may produce one favourable IHT consequence. Because there has been no valid lifetime transfer, there is no PET which can fail on death within seven years. That means the loan forgiveness itself cannot bring earlier chargeable lifetime transfers into the 14-year failed-PET cumulation calculation.

This is, of course, only an accidental upside, which one does not wish to rely on as an estate planning tool.

Parent’s estate planning

The £325,000 IHT nil rate band plays an important role in estate planning. If the parent’s estate planning has been carried out on the assumption that the value of the ‘released’ loan no longer forms part of the death estate, the nil rate band may be used up differently from what was expected. It is not that the nil rate band is lost; rather, it may be absorbed by an asset which the family thought had already disappeared from the estate.

This could affect planning for other elements in the estate, especially where the Will contains nil-rate-band legacies, discretionary trust wording, fixed cash legacies, or unequal provision between children.

Residence Nil Rate Band (“RNRB”)

The £175,000 residence nil-rate band is subject to detailed conditions and is only available where a qualifying residential interest, or a qualifying downsizing addition, passes to direct descendants. Where it is available, it is tapered by £1 for every £2 by which the relevant estate value exceeds the £2m taper threshold.

If the parent’s death estate is already close to £2m, the loan can push the estate value over that threshold. In a worst-case scenario, the RNRB could be tapered to nil if the size of the loan is significant. If there is an unused transferable RNRB from a deceased spouse or civil partner, the amount at stake could be higher than £175,000.

The 36% reduced IHT rate

An informal release of a family loan may also cause the loss of the 36% reduced IHT rate for the death estate. Broadly, the 36% rate applies where the charitable giving condition is met, which normally requires at least 10% of the relevant baseline amount to be left to charity. The reduced rate often produces an overall lower IHT liability.

If the informally released loan remains part of the death estate, a fixed charitable legacy in the parent’s Will may no longer be sufficient to meet the 10% test. If so, post-death variation may need to be considered.

Interest, evidence and valuation of the loan

It is also necessary to check the terms of the original loan. Was it interest-free or interest-bearing? Was it repayable on demand or on a fixed date? Was there any security? Were any repayments made? These points affect the evidence, the estate administration and, in some cases, the tax analysis.

For IHT purposes, HMRC’s starting point is that capital debts owing to the deceased at death, together with any interest due at that date, should be included in the IHT account as assets of the estate. A reduced value may be appropriate only where full recoverability is in doubt, and the evidence should support that reduced figure.

Silence can also create a limitation and evidence problem. An old loan may become harder to recover or value if the borrower has a limitation defence, there have been no acknowledgements or part-payments, or the terms are unclear. That is different from a deliberate release. It is a reason to take legal advice, not a reliable estate planning method.

Care fees planning may be affected

If the loan has not been validly released, it may remain part of the parent’s financial resources. If the parent realises the issue and then releases the debt correctly shortly before care needs arise, a local authority may investigate whether the parent deliberately deprived themselves of an asset to reduce or avoid care charges.

Surviving a lifetime gift for 7 years is irrelevant to the care fees position. The local authority looks at the facts, including whether care needs and care charges were foreseeable and whether avoiding care charges was a significant reason for the release.

Executors could be put in a difficult position

The primary duties of an executor include obtaining legal title to the assets of the deceased, collecting the assets, paying debts and tax and distributing the estate in accordance with the Will.

If there is an outstanding loan without evidence of an effective release, the executors have to decide whether to collect it, set it off against the borrower’s inheritance, appropriate it to a beneficiary, or deal with it in another way permitted by the Will and the general law. Executors cannot assume that a family understanding is enough if the legal and tax position points the other way.

Releasing the loan by Will is not the same as releasing it during lifetime

A parent may decide that the loan should be forgiven only on death. That can be dealt with in the Will, for example by directing that the debt is released, or by stating that the debt is to be brought into account against the borrower’s share of the estate.

That is different from a lifetime release. A release by Will does not start the 7-year clock during the parent’s lifetime. The debt remains an asset of the parent at death, and the IHT treatment then depends on the value of the estate, the terms of the Will and the exemptions available.

Causing dispute among family members

Whilst the borrowing child may think that the informally released debt was already forgiven by the deceased parent, other children and/or the surviving spouse may think otherwise.

A dispute is more likely where there is already tension between the borrower and the other beneficiaries, where the amount is significant or where the parent made unequal financial contributions to different children.

The result can be prolonged delay, legal costs and executors being put in a difficult position.

Causing difficulty to the surviving spouse

The position of a surviving spouse or civil partner should be analysed carefully. If the loan asset passes to the surviving spouse or civil partner under the Will, spouse exemption may prevent an IHT charge on that value. However, the practical problem may still remain: the spouse may receive an illiquid debt rather than cash or investments, and the executors may still need to decide whether the debt should be collected, assigned, released, or set off.

If the Will also contains chargeable gifts to children or other beneficiaries, the unexpected loan asset can affect the funding of those gifts and the allocation of IHT under the Will. The issue is, therefore, not always a direct IHT charge on the loan itself; it may be a wider estate administration and cashflow problem.

IHT reporting and challenge from HMRC

HMRC can be expected to focus on the legal and evidential position. If money was lent by the deceased parent and had not been repaid at death, it is considered as a debt due to the estate for IHT reporting purposes. If the family asserts that the loan was forgiven, HMRC is expected to demand the sight of evidence demonstrating that the debt was legally released.

If HMRC successfully challenge the legal effectiveness of an informally released debt, the result may be an increased IHT liability and a (significantly) reduced inheritance for the estate beneficiaries.

The need to reconstruct the facts

If there is a dispute, the borrowing child may need to prove the forgiveness. Where the position is unclear, it may become necessary to reconstruct the facts. Useful evidence usually includes the original payment records, any written loan agreement, messages between the parent and child, family correspondence, repayment records, entries in personal finance records, the Will, any letter of wishes, and any evidence showing a consistent history of gifts or loans within the family.

Again, this could be a prolonged and costly process, especially if legal professionals need to be involved.

Key takeaways for parents and children

A family loan should not be allowed to disappear by silence or by an undocumented informal release. It should be identified, documented and dealt with properly either during lifetime or in the Will.

For tax purposes, the conclusion is usually straightforward once the legal effect is clear. If there was no loan, there is no debt asset in the estate. If there is still a loan, it remains part of the parent’s estate unless and until it is released or dealt with in some other legally effective way. If the loan has been validly released during lifetime, the release date is the starting point for the IHT analysis.

For non-tax purposes, dealing with a family loan correctly is just as important. Executors need clear instructions. Beneficiaries need certainty. The borrower needs evidence. Without that, a family arrangement can become a tax enquiry, an estate dispute, or a care fees issue.

This article is for general information only and should not be relied on as a substitute for specific tax advice.