What happens to a family loan when the lender dies?

The loan outlives the lender

When someone dies, the money owed to them doesn’t dissolve. A loan you made to your son is, on the day you die, an asset of your estate — exactly like the house and the ISA — and the law is blunt about what happens next: an executor’s statutory job is to “collect and get in” everything the estate is owed (s.25, Administration of Estates Act 1925). The borrower’s side barely changes: the repayments continue, owed now to the estate instead of to you. What changes overnight is the audience. A loan that lived as an arrangement between two people is suddenly being read by an executor, a probate registry and possibly HMRC — none of whom were in the kitchen when it was agreed.

What the executor actually has to do

Money owed to the deceased counts in the estate’s value either way, and where a full inheritance-tax account is needed it gets its own schedule: IHT416, “Debts due to the estate”, filed with the IHT400. It asks for the capital and interest outstanding at the date of death, and it starts from the assumption the debt will be repaid in full — an executor who believes recovery is genuinely impossible has to explain why, with written evidence. Then comes the practical half of the job: finding the thing. Executors reconstruct family loans from bank statements and old texts more often than anyone would like; a signed agreement turns that archaeology into a ten-minute task, with the balance, the schedule and both signatures on one page. (For scale: the probate application itself now costs £526 for estates over £5,000.)

Inheritance tax counts it — even if the will forgives it

Here’s the part almost everyone gets backwards. Writing “any loan to my daughter is forgiven” in your will does not take the loan out of your estate. The debt still exists at the moment of death, so its value is counted for inheritance tax — the forgiveness simply operates as a legacy, and your daughter inherits her own debt. That can still be exactly the right plan; it just saves no tax. The numbers it’s counted against: the £325,000 nil-rate band (frozen until April 2031), up to £175,000 more where a home passes to direct descendants, and 40% on what sits above. The wider tax picture around family lending — interest, allowances, what needs declaring — has its own guide, and so does the inheritance-tax side in depth: the seven-year rule, deeds of release and the £3,000-a-year approach.

Forgiving it in life: the deed and the seven-year clock

To move the value out of your estate, the write-off has to happen while you’re alive — and HMRC’s manual is unusually specific about the mechanics. Waiving a debt for nothing in return is void “at law and in equity” unless it’s done by deed (IHTM19110). A warm message saying “don’t worry about the rest” may be morally clear, but the debt remains legally owed — and legally collectable by your executor. Done properly — a short deed of waiver, signed and witnessed — the forgiven balance becomes a potentially exempt transfer: survive seven years and it leaves your estate entirely. Small, staged forgiveness — a short deed each year — can shelter under the £3,000 annual exemption instead, as long as you haven’t used it on other gifts. Whichever route, date the paperwork and keep it with the loan agreement.

The limitation clock quietly matters

Ordinary contract debts can’t be sued for more than six years after they fall due (Limitation Act 1980) — but the classic family loan, open-ended, no fixed date, never formally demanded, gets special treatment. Under s.6 of the Act, the six years don’t start running until a written demand is made. Translation: the loan you made in 2015 and politely never chased may be very much alive for your executor to collect in 2026. A loan executed as a deed runs twelve years. None of this rewards vagueness — it just means an old loan isn’t as dead as families tend to assume, which cuts both ways. (If repayment has already stalled, the escalation ladder applies to estates too.)

No paperwork? The presumption problem

Where there’s nothing in writing, England & Wales adds an old equitable twist: money from a parent to a child is presumed to be a gift — the presumption of advancement. (Parliament voted to abolish it in the Equality Act 2010; the section has never been brought into force.) The burden of proving “loan” lands on whoever claims it — often the estate — and undocumented claims regularly fail. In Farrell v Burden (2019), a mother who had paid £170,000 towards her son’s home couldn’t prove it was a loan after he died. His widow said it was a gift, the mother lost, and she was reportedly ordered to pay around £100,000 in costs on top. The same presumption is what turns undocumented Bank of Mum and Dad money into sibling warfare after a death — one child heard “gift”, the others heard “loan”, and the only witness is gone. And if a mortgage was involved, the gifted-deposit letter the lender required is powerful evidence of a gift, whatever was privately intended. Decide which one you mean — then write it down.

If the borrower dies first

Flip the picture: if the person who owed you money dies, you’re now a creditor of their estate, and the debt survives. Put your claim to the executors promptly, in writing, with the agreement attached. Executors commonly advertise for creditors in The Gazette (s.27, Trustee Act 1925) and can distribute two months later — miss that window and, while the debt isn’t extinguished, recovering it gets markedly harder. If the estate is insolvent, unsecured lenders share what remains after funeral and administration costs — and, a quirk worth knowing, a loan from the deceased’s own spouse ranks last of all. In every version of this story, the lender who gets paid is the one who can prove the debt on one page.

Three things to put in place now

First, put the loan itself in writing — amount, schedule, what happens early and late — so that neither an executor nor a sibling ever has to guess. Second, make your will and your paperwork tell the same story: if you intend to forgive, say so explicitly (knowing the tax treatment above); if you intend the balance to come off that child’s share, say that instead. Third, make it findable. Tell your executor the agreement exists and where it lives. A LendRight agreement helps with all three: both people e-sign, both hold identical sealed copies, and the signing certificate can be verified as genuine at verify.trylendright.com years later — which is precisely when it matters.

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