My son helped me with £90,000 after I was in want – if I repay him will we get a tax invoice?

Six years ago, my son helped me financially to stay in my house when my relationship broke down. 

He paid off my partner then supported me by paying me a monthly amount.

He stopped paying me after a few years. I have now sold my house, and I want to repay him. The total amount is about £90,000.

What is the best way to repay him, and does it cause him any problems with tax? N.A, via email

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Harvey Dorset, of This is Money, replies: It was generous and selfless of your son to help you to the tune of almost £100,000. Not every family is this close and not everyone could afford to do such a thing.

Understandably, now that you are in a better position, you want to give back to him. But you are right to be consider whether you or he will face tax liability as a result.

As is discussed below, the potential for thos depends largely on the way your son initially gave you the money.

This is Money spoke to two financial advisers to find out how you can pass money back to your son without either of you facing a tax bill.

Sean McCann, Chartered financial planner at NFU Mutual, replies: Providing financial support to family members is increasingly common. 

Whether it’s regular monthly amounts to help with living costs or larger one-off payments to help get a foot on the property market, it’s important to understand the tax implications.

The starting point is to establish whether the funds your son provided to you were made as a loan, with the expectation that it would be repaid, or as a gift. 

This can make a big difference from both a legal and tax perspective.

Ideally, at the outset there would have been a written agreement setting out the intentions of both parties. 

If the money was being given as a gift this should be clearly stated, or if a loan, it should make clear any interest payable and how and when the loan is to be repaid.

However, it is not unusual to see more informal verbal arrangements within families, which can cause legal and tax issues in the event of a relationship breakdown or the death or bankruptcy of one of the parties.

What happens with a loan 

If the sums paid to you by your son were always intended to be loans, you could repay the original amount borrowed without triggering a tax liability for him. 

If any part of the payments you make represents interest on the loan, your son will need to declare it to HMRC for income tax purposes.

From an inheritance tax perspective, while the loan is outstanding, in the event of your death, it would normally be deducted from the value of your estate before calculating any inheritance tax due. It would however be included in your son’s estate for inheritance tax purposes.

If your son decided to waive the loan, this would be a gift for inheritance tax purposes from the date he makes that decision. Provided he survives seven years from then, it would be free of Inheritance tax on his death. 

The amount waived would, however, be included in your inheritance tax calculation.

What about if the help was a gift

If the payments made to you were deemed to be gifts, your son may have taken advantage of both the annual exemption which allows him to give away up to £3,000 each tax year, and the ‘gifts from normal expenditure’ exemption which allows him to give away regular amounts from his income, provided it didn’t impact on his normal standard of living.

In addition, he may have taken advantage of the rule that allows you to make ‘reasonable provision for a dependent relative’s care or maintenance’. 

It normally applies where the relative is unable to maintain themselves because of old age or infirmity but this is not a requirement where the recipient is the mother of the person making the gift, unless she is living with a spouse or civil partner.

Any amount not covered by exemptions, will continue to be included in your son’s inheritance calculation for seven years after he made the gift.

By gifting the money back to him, you may be increasing his potential inheritance tax liability.

The best course of action will depend on your own and your son’s circumstances, particularly from an inheritance tax perspective and whether the payments he made to you are deemed to be loans or gifts. It’s important to take advice before making a decision.

How to pay the money back and create a paper trail 

Sarah Arora, independent financial planner at Flying Colours, replies: The answer to your question really depends on how you set out and agreed the financial transactions between you, if you did this?

If your intention is to purely repay a loan from your son, the most straightforward way is to transfer the funds direct from your bank account to his. 

From a tax perspective, the repayment of a loan does not create any liability for him as you are returning the money he gave you.

However, you need to clarify the nature of the financial support he provided — if the money your son gave you was intended as a loan, then repayment is simple, and there are no tax implications.

If the financial help your son gave you was intended as a gift, then the repayment back to him would now be treated as you gifting him money. 

This will have an inheritance tax implication for you as it becomes a potentially exempt transfer (PET). A PET falls outside of your estate if you live for seven years after the gift is made.

To ensure that there are no future disputes or HMRC queries, it would be sensible to draw up a document stating the amount of money your son provided, that it was a loan (if this is the case) and that you are now repaying it.

This gives a clear paper trail should this be questioned later in future.

When repaying via your bank transfer make a clear reference, such as ‘loan repayment’, again if this is a loan.

A couple of points to consider regarding your son’s financial position:

• Is your son a UK resident and domiciled? We have assumed so but if not, cross-border tax issues may apply.

• Would a large transfer cause issues for your son in terms of his own financial planning and circumstances?