IHT Planning: Gifting a Director Loan to Children

With significant reforms to Business Property Relief (BPR) arriving in April 2026, high-net-worth individuals—particularly company directors and sole shareholders—are increasingly exploring how to structure their estate to minimise Inheritance Tax (IHT).

One such approach involves assigning a credit director’s loan account to adult children. While this can be a strategic move, it’s filled with legal and tax complexities, including the risk of gifts with reservation of benefit (GWR).

Here’s a detailed look at how such a transfer works, the IHT implications, and how to structure it properly to remain compliant—and effective.

What Is Being Transferred?

In this case, the client is the sole shareholder and director of a UK company. The business owes him money via a director’s loan account—a “chose in action”, meaning a recoverable legal right to payment. The client wants to assign this loan to his adult children as part of broader IHT planning.

Importantly, no interest is currently charged on the loan, and it remains unpaid.

Step One: Review the Legal Mechanics

Before diving into tax matters, the assignment itself must be properly structured:

• Under Section 136 of the Law of Property Act 1925, for a legal assignment to be valid:
  • It must be in writing
  • Signed by the assignor
  • Notified in writing to the debtor (the company)

Failure to comply results in only an equitable assignment, which has limited enforceability and could complicate matters later. So legal advice is essential.

Step Two: Understand the IHT Implications

At present, the loan is part of the director’s estate, as defined under Section 5 of the Inheritance Tax Act 1984 (IHTA 1984).

Assigning the Loan Is a PET

• Assigning the loan is treated as a Potentially Exempt Transfer (PET) under Section 3A IHTA 1984.
• If the client survives 7 years from the date of the gift, it becomes exempt from IHT.
• If the client dies within 7 years, the PET fails, and the loan’s value becomes part of the chargeable estate—reducing or eliminating the nil-rate band.

Who Pays the Tax on a Failed PET?

According to Section 199(1)(b) IHTA, the recipient (the children) is primarily liable for the tax, not the estate.

Step Three: Avoid the GWR Trap

Even if structured as a PET, the transaction could still fail for IHT purposes if it triggers the GWR rules under Section 102 of the Finance Act 1986.

GWR applies when:

• The donor still benefits from the gifted asset.
• The donee (the child) does not fully assume possession and enjoyment.

Why This Case Raises GWR Concerns

• If the loan remains unpaid and the company continues to use the funds, the children aren’t enjoying the asset, and the donor (the director) retains indirect benefit—especially if dividends or capital are drawn from the business.
• That puts the gift squarely within GWR territory.

Step Four: Make the Loan Interest-Bearing

To escape GWR and demonstrate real benefit to the children:

1. Amend the loan to charge a commercial interest rate.
2. Ensure that the children receive the interest income.
3. Structure repayments in a way that allows the loan to be repaid over time

This aligns with HMRC’s stance in IHTM14332, which says that actual enjoyment—such as receiving income—is required to avoid a GWR designation.

Bonus Tip: Make the Loan Repayable on Demand

This improves the enforceability of the gift and supports the idea that the children genuinely control and benefit from the loan.

What If Interest Is Charged?

From an Income Tax perspective, there’s no issue with the loan becoming interest-bearing.

• Under Section 201 of ITEPA 2003, charging interest at a commercial rate does not constitute a taxable benefit.
• It also wouldn’t be seen as a benefit “by reason of employment”, so there are no complications under PAYE.

For the company:

• The interest paid will be an allowable deduction under the loan relationship rules in the Corporation Tax Act 2009, provided the rate is a commercial rate.

Capital Gains Tax (CGT) Considerations

While a director’s loan is a chargeable asset under Section 21 of the Taxation of Chargeable Gains Act 1992, Section 251 TCGA 1992 exempts the gift of a simple debt from CGT. Therefore, no CGT liability arises on the assignment, even though it’s made to a connected person.

Practical Recommendations

To execute this plan correctly and reduce IHT exposure while avoiding GWR pitfalls:

• Legal Assignment: Ensure full compliance with Section 136 of the Law of Property Act 1925 and seek legal advice.
• Update the Will: Verify that the terms of the client’s Will do not conflict with the assignment.
• Make the Loan Interest-bearing: Charge commercial interest to demonstrate genuine benefit to the children.
• Structure Repayments: Ensure the company begins capital repayments to the children as soon as feasible.
• Keep the Paper Trail Clear: Document all changes carefully and seek both legal and company law advice where required.

Final Word: Assigning a director’s loan can be an effective IHT planning tool, but it’s not without risk. GWR, failed PETs, and unintended tax liabilities are all possibilities if the loan is not structured properly.

By taking proactive steps—making the loan interest-bearing, ensuring legal assignment, and aligning it with a clear Will—you can preserve value for the next generation while avoiding costly pitfalls.