A beneficiary of a discretionary trust wishes to borrow £50k from the trust (around a quarter of the total fund). The trust provisions are broadly drafted and empower the trustees to lend to a beneficiary, either with or without security and with or without interest. The trustees are happy to exercise this power for an unsecured interest free loan repayable on demand. Is it sufficient for this to be documented via a trustee resolution? Or might a simple exchange of letters suffice? Or are there strong reasons for a formal loan agreement to be put in place?
Many thanks for your thoughts!
My preference would be for a formal agreement (deed) to be put in place,
which need not be very long, but would cover situations like the death
of the beneficiary or for any other reason their ceasing to be a
beneficiary.
This could be immediate repayment without the need for the trustees to
serve a demand and, perhaps interest from the date of such event. If
they cease to be a beneficiary, why should they or their estate continue
to benefit at the expense of the trust?
I will reply this from a trust tax accountant point of view rather than a trust lawyer!.
A loan agreement is always recommended. HMRC may ask for this if there is an inquiry into either the beneficiaries tax affairs or the trusts.
Some trusts can only make loans by deed of appointment, so good to check the trust deed on this.
Depending on if its a UK or offshore trust, interest or interest-free loan, the beneficiary with have on going tax obligation to report the BIK (if interest-free) or withhold 20% W/T (if foreign trustees) in their tax return.
Also do bear in mind, that there are some loan agreements that can differ the payment of interest to when loan is repaid.
It’s likely Finance bill (2) 2017 will introduce quantifying the annual benefit, regardless if beneficiary is paying interest or not.
Paul: very many thanks for your helpful thoughts. I particularly take the point about the desirability of repayment on death or on ceasing to be a beneficiary. Is there a suitable precedent you could point me to?
Sameera: Thank you very much for your input. The comments from Paul and yourself have persuaded me that we should put a (simple) formal loan agreement in place to avoid any doubts. The trust deed does not appear to require a formal deed of appointment.
You raise questions of tax - the trustees and beneficiaries are all UK resident, so the offshore considerations thankfully do not apply. You also refer to Finance Bill (2) 2017 as introducing an annual benefit calculation - are you referring to the old Schedule 14 of Finance (No 2) Bill 2017 which got dropped prior to the Election? If so, I’d read this as applying only to CGT on offshore trusts - have I misread this?
I have not read if it only applies to CGT, and also not sure what you mean as ‘apply to CGT only’. Sorry for missing the point.
Just to clarify, we are discussing quantifying the annual benefit, rather than it applying to CGT.
Any benefit to a beneficiary (once quantified) has to be matched with available relevant income first and then to stock piled gains in the offshore trust. So not just to stock piled gains, unless the beneficiary is a ‘capital only’ beneficiary.
You talk of quantifying the annual benefit of the loan for tax purposes, and of the beneficiary returning a BIK figure on their return. The only provisions I’m aware of which might require this are the provisions which were Schedule 14 of the Finance (No 2) Bill 2017 - is this what you were referring to?
If so, my reading of this schedule is that it applies only to offshore trusts, not to UK trusts.
As far as I’m aware, if a UK resident trust makes an interest free loan to a UK resident beneficiary, there is no income tax consequence for either the trustees or the beneficiary. Or am I missing something obvious?
Schedule 14 F (No 2) Bill 2017 proposed to amend TGCA 1992 (s97 et al) and the Income Tax Acts. It provided for a determination as to the taxable value of benefits received from non-resident trusts by way of loans etc.