Does waiving a promissory note escape the tax?


(jane.whitfield) #1

I am dealing with a standard NRBDT which was appointed out to the widow in exchange for a promissory note. The promissory note included the usual provisions regarding index-linking.

The widow has now died and we are advising on the repayment of the debt to the trust. As the promissory note was held for a considerable time, the indexation is significant. As the indexation is now treated as income by HMRC and not a capital gain, there is going to be a big income tax bill for the trustees.

The beneficiaries of the widow’s estate are the same people as the beneficiaries under the husband’s NRBDT. The trustees have asked if the income tax liability is escaped if they appoint the benefit of the loan to the beneficiaries and the beneficiaries then forgive the debt.

Any thoughts gratefully received.

Jane Whitfield
Barrett & Co


(Paul) #2

You need to be a little bit careful about appointing the debt out of the trust in case that itself gives rise to a tax charge (albeit probably unlikely). In the circumstances you describe it might be better for the trustees to forgive the debt.

The main problem, since 17 July 2013, is that if the debt is not repaid in full, you are unlikely to be entitled to a deduction in respect of it for IHT purposes (s 175A IHTA84).

Paul Davies
DWF LLP