NRBDT comprising secured equitable charge-effect on RNRB & SDLT

I posted the following at the end of April last and have not received any comments at all. How are other members treating such trusts to maximize the RNRB going forward please?

Original post;
"NRBDT comprising a secured equitable charge over property transferred to W after H’s death many years ago.
To maximize RNRB on W’s death going forward the trustees are now considering releasing equitable charge and replacing this within the trust with an IOU in their favour from W but unsecured. The concern is SDLT.
The HMRC SDLT manual (for any settlement other than a bare trust) says;
"Where payment for a power of appointment or discretion to be exercised is made, it will be treated as consideration for the acquisition of a land interest through the exercise of the power or discretion.
Therefore, where consideration is provided to the trustees in exchange for the excise of their power of appointment so that an interest in land passes out of the trust to a person, the consideration so provided is treated as consideration for the acquisition of the relevant interest in land."
It seems then that SDLT will therefore be potentially be payable depending on the amount of the consideration.
What please are other members views and how are others treating similar trusts to maximize the RNRB going forward.

Angela Scott
Thomson & Bancks LLP

If money could be found within the family to repay the loan that would solve it. An unsecured iou could be considered as a separate exercise at a later date

Simon Northcott

The equitable charge may have been put in place partly to ensure the debt was enforceable, which might not be the case if W had made a gift to H and signed an iou, so care is needed. More likely it was done to save SDLT. Agreeing to the transfer of the security to other assets might work, but the wording could still catch it. Your clients may just have to accept paying sdlt now is a reasonable price to pay for the iht saving.

Simon Northcott

I raised a related query in April 2016, under the heading ‘Residence Nil Rate Band NRBDTs & equitable chargeshttp://trustsdiscussionforum.co.uk/t/residence-nil-rate-band-nrbdts-equitable-charges/1961’. The only response I received was from Simon Northcott which for convenience I have copied below:

“If there was a NRB trust on the first death, there is presumably no TNRB available on the second death in respect of that spouse. The RNRB will not have been used on the first death, so is transferable. If the surviving spouse has a half share of the house, then if her share is worth at least £350,000 she will be able to use her RNRB and the TRNRB. If she has downsized those provisions may help.

Otherwise, a release of the charge may be an answer, if the trustees have the power to accept an unsecured iou, and provided Phizackerley is not a problem, or the charge could perhaps be secured against other assets owned by the surviving spouse.”

I too was concerned about SDLT but am not sure now and I would be very glad to hear others’ views.

Under an equitable charge the widow was not (normally) personally liable for the payment of the debt. She would simply own the whole property subject to the charge, which the executors imposed before transferring the deceased’s interest in the property to her.

If the widow gives the Trustees an IOU in exchange for the release of the equitable charge, is that transaction subject to SDLT? I don’t see why it should be because she is not acquiring an interest in land in consideration for the IOU – she already owns the property. No SDLT is payable if you repay your mortgage and this looks similar to me.

So that might be the solution for trusts where this is a problem, although as Simon says, it may be that the widow’s interest in the property subject to the charge is sufficient to use the whole of the RNRB and TRNRB anyway.

Another point I wondered about in relation to this is that if you swap the equitable charge for an IOU do you trigger the payment of indexation or interest under the equitable charge? Notwithstanding James Kessler’s view that no tax is payable on the index-linked increase we know that HMRC think differently and do you really want to have that argument now? Could the indexed increase and/or interest charge be deferred and transferred to the IOU? Again, I don’t see why not, but would be interest to hear what others think.

Diana Smart
Gordons LLP

Hello,

I have the exact same queries as above and would really appreciate your views.

I am advising a family whereby Dad’s will had left a NRBDT and this legacy had been satisfied by two equitable charges over main residence and another property. Wife has now moved home and the trustees have considered wrapping up the trust but wish to retain it because W has an IHT exposure but isn’t happy releasing the whole trust down to the next generation at this stage. Initially, they instructed me to update the charge but because W’s estate should qualify for RNRB, I advised them to reconsider (there would not be sufficient equity in the property to repay the charge and benefit from RNRB/TNRB as the property is only valued c. £400k.

We considered repaying the loan and investing it but they have decided they would prefer to release the charge(s) and replace with an IOU but on the same terms i.e. linking the original 285k to the RPI. The terms of the original equitable charge are that it is repayable within 6 months of demand by the Trustees, which they have not done. So I am hoping that means there is no risk of HMRC arguing that the interest should be repaid/calculated now.

So, my questions are the same as yours - (1) does the exchange of an IOU instead of an equitable trigger an SDLT charge and (2) could there be an argument from HMRC that the RPI should be calculated and interest paid now before that sum is recorded as the new loan in an IOU? (or can I replicate the RPI calculation in the IOU from the charge - which starts from the date of that charge)

Also (3) In my case, there were two properties charged in one charge document. It would be easier to replace the whole thing with one IOU - can anyone see any merit in keeping the charge over the property that has not been sold?

Helen Gaskell
Marsden Rawsthorn

Usually, the ability to adopt the IOU arrangement is when the trust is established, and not at some later date.

At the present time, the trustees have security for the NRB sum comprising the trust fund. Should they exchange this for an IOU and, at the end of the day, the full amount due is not received they may be personally liable for the shortfall.

Should the trustees subsequently make an appointment in favour of the widow which would have the effect of avoiding liability for any shortfall, it may be open to a disappointed beneficiary to assert such appointment was in breach of trust.

I would be reluctant to exchange the security of a charge with the uncertainty of an IOU, without the protection, say, of a supporting opinion from Chancery Counsel.

Paul Saunders

Hi Paul

Thank you for your reply. The wording in the Will does allow the Executors to satisfy the NRB legacy by requiring the Trustees to accept a binding promise of payment made by wife. A separate power then allows the Trustees to lend money to the spouse. It also includes the power for the Trustees to leave debt outstanding and to waive payment of all or any part of it (or interest on it). So I do not think it is outside of the scope of the powers of the Trustees to accept the unsecured IOU. In reality, the future potential beneficiaries are the children and Trustees agreeing to this decision so I cannot see any real risk. Furthermore, her estate is substantial (at the moment, obviously this could change). I intend to replicate the calculation for RPI in the IOU so that the amount eventually repaid will be the same as if the loan was secured.
Do you have any comments relating to the potential SDLT/income tax points?
Many thanks again

Helen Gaskell
Marsden Rawsthorn