It happens not infrequently. A parent helps out an adult son or daughter by lending money to meet a particular demand: perhaps a deposit for a house, school fees, home improvements or whatever.
Time passes; you decide that you are never going to need the money to be repaid and that it makes more sense in terms of Inheritance Tax (‘IHT’) planning for it to be treated as a gift. So, mindful of dotting the i’s and crossing the t’s, you write a formal letter confirming that repayment of the debt is being waived. Obviously, it’s a potentially exempt transfer (‘PET’) at that point, but provided you survive seven years, there’s no problem.
Obvious; but wrong.
The problem is that there is a general rule to the effect that an agreement made without consideration isn’t enforceable. If you owe me £100 and I say, “Forget repayment – keep the money”, that doesn’t ordinarily prevent my enforcing the debt in law or equity. Similarly, if a parent simply writes to confirm that repayment will not be pursued, it doesn’t extinguish the debt: it remains an asset of the parent’s estate for IHT purposes.
Nor does it work to accept a nominal amount in repayment of the debt. That was established in ‘Pinnel’s Case’ in 1602: the payment by a debtor of a smaller sum in satisfaction of a larger one is not a good and valid discharge of the debt. Not, at any rate, unless it’s repaid early: if I am due to pay you £1m on Friday and you agree to accept £1 in full settlement provided I cough up by Thursday, that, bizarrely, is OK.
So how do you solve the problem?
The conventional method is to document the waiver in a deed. Following the abolition 30-odd years ago of most formalities, this means little more than a signed agreement which makes it clear that it is intended to be a deed; so is not particularly onerous to prepare. But if you don’t want to do it yourself, you’ll need to instruct a solicitor or other ‘authorised person’ (which sadly doesn’t include mere accountants) to prepare one, as the preparation of a deed is a ‘reserved activity’ under the Legal Services Act 2007.
Failing that, there’s an intriguing alternative. You could agree to accept something – literally anything other than money – from your debtor in settlement of the debt. The value of what you accept is irrelevant. As one 19th-century judge put it:
‘According to English Common Law, a creditor may accept anything in satisfaction of his debt except a less amount of money. He might take a horse, or a canary, or a tomtit if he chose, and that was accord and satisfaction; but, by a most extraordinary peculiarity of the English Common Law, he could not take 19s 6d in the pound’
Of course, to the extent that what you accept is less than the value of the debt, that is a PET. And no doubt the RSPB would have something to say about settling debts with tomtits: but that’s another problem for another day.
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