The question is a bit difficult to grasp so let me give some background first. Let's say person A uses some of his own money and loan's money from person B to buy a house (at an interest rate lower than he would get from the bank). Person A rents out the house to get rent income while slowly repaying the debt. Person B in the meantime passes away and an inheritance amount is allocated to a trust (but I'll refer to it person C for simplicity).

So Person C should get an inheritance from person B (which is no longer), and person A is in debt to person B. Now my questions are the following:

How do you calculate the amount that person A owes to person C (considering rent income was used to pay off debt)? How does person A go about repaying person C? Should the rent income go to C directly as repayment or should A take out another loan to pay off the debt to C first?

  • Has the estate already been settled? Because if it has, and the loan wasn't considered, that may have affected estate/inheritance taxes. – mkennedy Oct 15 '19 at 18:35
  • @mkennedy The estate is not settled, some of the loan amount is needed to realise the full inheritance. This is in South Africa where an [Estate Duty] (sars.gov.za/ClientSegments/Individuals/Tax-Stages/Pages/…) (essentially tax on inheritance exceeding a certain amount) is levied on the Deceased Estate, but I must be honest I don't understand the jurisdiction very well especially if the Deceased Estate still generates and income (in the form of dividends) – Oom_Ben Oct 16 '19 at 14:32

You read. The loan agreement. Then you use basic financial math to calcualate a repayment schedule for the loan for the given interest rate and apply the done payments to it.

That rental income was used to repay the loan is a totally irrelevant fact. It is like any other longer term loan ever given from a bank - there is a repayment schedule and you apply the payments done to it.

How does person A go about repaying person C?

The way that was postulated in the loan agreement.

Should the rent income go to C directly as repayment or should A

So there are no running costs and repairs to be handled from the rental? Funny rental that is. I own some and I have to pay costs left and right all the time. So, no - you go on paying as per agreement.

or should A take out another loan to pay off the debt to C first?

Given that the loan was CHEAP that would put a into the idiot category? Pay of a loan with another loan that has a higher interest rate. Why should he, unless there is a legal requirement to repay as fast as possible. Stick to the original agreement.


(This is from a UK perspective, and with the usual caveat that I am not lawyer but I have been the executor of a couple of wills. Other common law jurisdictions are likely to follow similar principles)


We need to distinguish 4 actors, not 3: A - Borrower B - Lender, who has died C - Trustees of the estate, created on B's death D - Beneficiaries of the the estate

Even if C and D are the same actual humans they are legally distinct. C does not get an inheritance - they administer the estate. D receives any inheritance.


The basic principle is that B's death cannot impose a new obligation on A. It only affects A's obligations if there were terms in the loan agreement covering the event of B's death. If there were express terms for this eventuality they would also define the amount to be repaid.

Assuming there are no such terms in A's loan agreement, A is perfectly entitled to keep paying the loan repayments for however many years the agreement is for.

There is no need therefore for A to make a valuation of the the loan payments or rental income.

The trustees C will have opened a new bank account to keep the estate's assets separate from their own, and A will be given the new banking details to make the payments to the estate.


There might be a mutually acceptable price at which A and C would agree to settle the loan now - but that is simply a matter of negotiation.

The low interest means that the value of the loan to the estate is lower than its headline value. For example if the loan is £!00,000 at 4% for 10 years, fixed monthly payments would be c £1,009. If the market rate was 8% the fixed monthly payment on a loan of £100,000 would be c. £1,199.

At 8% for 10 years, monthly payments of £1,009 correspond to a loan amount of £84,183 so C might reasonably settle the loan for a payment of c £84k.

If the value to C of cash now is greater than the cost of new borrowing is to A then there should be a range of values at which both are happy to settle the loan now. If not then not.


C will need to value the future income stream from the loan for inheritance tax purposes, and can't distribute anything to D until the tax is paid (if the rental income is large and comprises a large proportion of the estate it may be possible to pay in installments but the rules are complicated)

The valuation method needs to be acceptable to HMRC - probably a net present value conceptually similar to the one above - with (no doubt) some question over the discount rate. (If the loan is settled with A for cash, the value is simply the cash received).


For C all this is sufficiently complex that they should get legal & tax advice on what is presumably a substantial amount of money.


Based on what you have written, A didn’t borrow money from the trust (C), so A doesn’t owe C anything. Whether the debt A owes B is assignable from B’s estate to C is a question for your lawyer.

  • Actually he DID rent from the trust as the trust is the legal inheritor of the dead contract partner. The loan was part of the estate. – TomTom Oct 15 '19 at 9:46
  • @TomTom Rent and loans are separate issues, even if the rental money goes some way to repay the loan. Nevertheless, I acknowledge that it is possible I misread the question. Please point out where the question said that A took a loan from C. – Lawrence Oct 15 '19 at 10:30
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    "Person B in the meantime passes away and an inheritance amount is allocated to a trust " and "loan's money from person B to buy a house". The loan is towards B and B died, so the trust is the estate from B including the loan agreement as asset. – TomTom Oct 15 '19 at 10:38
  • I’ve edited to address B’s loan to A. I am not a lawyer, and I don’t know whether loans can be assigned by a will without an assignment clause in the loan documentation. If it can’t and there isn’t an assignment clause in the loan documentation, A might remain in debt to B’s estate, but that’s different from what the OP is asking about, which is A being in debt to C. – Lawrence Oct 15 '19 at 10:39
  • @TomTom It might be different in the OP’s jurisdiction, but where I live, trusts aren’t all testamentary trusts. I hadn’t even considered that the OP’s C was a testamentary trust. In any case, even a testamentary trust is a separate entity from the estate itself, though I don’t know how loan assignment works with them. – Lawrence Oct 15 '19 at 11:05

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