Category Archives: Legal News

What is a Debenture and when it is used?

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Debentures have become increasingly popular in recent years and are typically used as a means of securing debt. Investing in or lending to a business is never without risk, but debentures provide an element of protection for the investor/lender.

They can also be a useful tool to borrowers who would otherwise struggle to attract debt finance on reasonable commercial terms.

What is a Debenture?

A debenture is a legal agreement between an investor and a borrower, in which a loan is secured against some or all of the company’s assets. It is a form of charge, similar to a mortgage. The lender can expect to have a priority claim on the business’ assets in case of insolvency or defaults on payments of interest or capital.

In addition, a debenture awards the lender the rights of a mortgagee, giving them an element of control over the company’s assets. They must be consulted on the sale of assets outside of normal business transactions, and can require the borrower to obtain their consent before doing certain things that might change the risk profile of the investment.

If the company were to run into financial difficulty, the lender can ultimately assert their powers to appoint their own administrators to take over the business and realise the assets.

When is a debenture used?

A debenture is generally used in circumstances that may be deemed a higher risk for the lender. When investing in a business, the lender must rely on the creditworthiness and likely success of the business in order to get a return on their investment. A debenture provides a layer of protection for the investor. If things were to go wrong, the holder of a debenture takes a prior claim over company assets to any unsecured creditors, increasing the likelihood that the lender will be able to reclaim their debt if the worst were to happen.

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Deed of Gift – when do you need one?

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Most commonly found in the legal world, a Deed of Gift is a signed document which legally transfers ownership of real, personal, and intellectual property to someone new – whether it be an individual, charity or institution.

What are some examples of a Deed of Gift?

Though some confuse it with part of a Will and Testament, a Deed of Gift is made when the Donor is still alive and wants to simply transfer formal ownership of an object, money or gift in kind. It is not a legally required document for the exchange of a gift, but rather is used to protect the interests of both parties when a Donor decides to gift something high in value to a Donee.

Common examples include:

  • The gifting of objects or property, for instance when a historian chooses to gift some ancient documents to a museum for public consumption, or when a wealthy family choose to gift property to a charity such as the National Trust. These kinds of donations, as with other Deeds of Gift, are unconditional, passing complete ownership from the family or individual over to the institution which will use them.
  • A cash gift is one where a sum of money is transferred, often to family members or charitable organisations whom the Donor wishes to support with immediate effect.
  • Gifting shares is a long-term investment and is often regarded as a way to future-proof family members or the income of an organisation; providing them with long-term wealth rather than an immediately accessible monetary deed of gift.

What are the defining features of a Deed of Gift?

In order for it to be considered a gift in full, one of the primary conditions is that the Deed of Gift remains irrevocable and entirely unconditional. Once ownership of the gift has been signed over to the Donee, the Donor is not able to retain any stakes or interest in the object or gift.

The other defining feature linked to a Deed of Gift is the absence of any kind of payment – that is, the gift is received by the Donee, with no transfer of money or payment in kind for the gift.

When do you need a Deed of Gift?

In short, a Deed of Gift is required when the interest of both the Donor and the Donee need to be protected during the transfer of ownership.

Provided the Donor lives for at least seven years after the gifting has been transferred, the gift is not subject to Inheritance Tax and so it exists outside of their general Estate. In line with the current tax rules in the UK, any cash amount will only be subject to inheritance tax if the Donor dies within 7 years of the Deed of Gift being signed. However, if the Donor does die within 7 years then the standard inheritance tax will be due.

Due to this condition and the reduction of inheritance tax provided the Donor lives for more than 7 years beyond the gift being made, Deed of Gift’s are often used by those trying to reduce their families exposure to inheritance tax in the future when they do die – enabling them to sign property, cash gifts, shares and other valuable objects over to their family in advance – and before inheritance tax comes into play.