Taxation of loan from discretionary trust on death

Trusts Discussion
1

I am really grateful for any help anyone can give as all my efforts to research have come up with conflicting information.

My client is the beneficiary of a discretionary trust set up by her deceased mother. Some time ago she took a £160,000 interest free loan from the trust which she used to purchase a property. The trustee solicitor has told her that there is no need for her estate to pay back the money on her death and that it will be deducted from the gross value of the estate before calculating IHT, thereby saving £64,000. My understanding is that, while this used to be workable, the Finance Act 2013 restricted the ability to deduct this type of liability on death from an estate when calculating IHT, unless the loan was actually physically paid back.

Thank you in advance for any help.

Nikki Hobbs
Respect Wills

2

The new rules can be found in HMRC’s inheritance tax manual under IHTM28027, found here: https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm28027

You are correct that the revised rules state that the loan should be repaid however there are exceptions which are explained in IHTM28029 as found here:
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm28029

Basically unless there is a commercial advantage to the trust in allowing the loan to continue then it must be repaid in order to claim relief. As the loan is interest free it appears it would be difficult to argue it is for the commercial gain of the trust.

Luke Pickering
Thomas Coombs