Discretionary Trust, 10 year charge, payments of capital

I am dealing with a Discretionary Trust and we have just come to the second 10 year anniversary. The main asset within the trust is an Offshore Bond and small amounts of capital have been withdrawn and paid out to a beneficiary. The value of those withdrawals have been added in for the purposes of the IHT calculation.

It has been suggested that because there was a charge to IHT at the first ten year anniversary and capital is subsequently appointed out, each withdrawal will attract a separate IHT charge. It has further been suggested that the trustees may wish to agree going forward that each capital distribution is a loan in advance and to roll up the amount loaned over the ten years and to treat the loan as being forgiven at the 10 year anniversary.

The Trustees do meet every 6 months and the minutes of those meetings do confirm the ongoing agreement for the small amounts of capital to be paid out.

I would be interested to hear forum members views on this and if correct, whether it is necessary to have a formal “loan” arrangement in addition to or in place of the trustees minutes. There is nothing in the Trust document that says that any loan must be made in writing.

Justin Wallace
Brewer Harding & Rowe

Yes, each withdrawal from the offshore bond, when appointed to the beneficiary, will be subject to an IHT exit charge.

To my mind, the waiver of the loan, whenever this occurs, will be treated for IHT purposes as capital distribution and again, subject to an exit charge.

Paul Storrie
Storrie & Company

If the trustee resolutions show they exercised their discretion to make distributions, to now argue that they were merely loans contradicts the evidence and would likely be seen as an attempt at tax avoidance at some level.

After the first 10 year anniversary, an exit charge will have been due on each distribution, applying the “estate rate” from the 10 year charge.

Going forward, if the trust allows, the trustees could treat further payments as loans, but to re-categorise past payments as loans where the supporting paperwork identifies them as distributions is probably asking for trouble.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

I agree with Paul but the situation is potentially more fraught. Lay clients and some advisers often do not appreciate that deliberate re-characterisation of a transaction coupled with representations to third parties including HMRC can be fraud. Do not pass go, do not collect £200.

It is permissible to:

(a) confirm what all relevant parties actually believed at the time but just did not write down;
or
(b) adopt a plausible rational analysis where no one gave any thought at all to the issue at the time,

provided that in each case that no attempt is made to disguise the fact that this constitutes action taken after the event.

Even so the action may not be beyond challenge. Those involved must bear in mind the spectre of the possible disgruntlement of later generations (or the people they marry who have no family loyalty and may be conflicted or just “difficult” e.g. qualified as a private client lawyer!). Where uncertain or disputed issues are settled contemporaneously in relation to trusts or estates among those presently living the likely effect on such spectral beings should not be overlooked. Because beneficiaries are essentially “volunteers” they can be hostages to what a judge ultimately perceives as due, but different, administration.

Jack Harper