Term loan from settlement

I have a client who wants to give a substantial sum to his son for a house deposit.

For long-term IHT mitigation and estate planning, father will make the gift to a discretionary settlement, which will lend the son the money, interest-free.

I would normally make the loan repayable to the trustees on demand, but I have heard reports of mortgage lenders who are unhappy to accept the uncertainty inherent in that arrangement.

I therefore propose to make the loan repayable on demand, but not during the term of the mortgage.

Does that give rise to any technical problem I have not spotted?

Michael Cutler

Colemans Solicitors LLP

You will presumably need to take into account that many people now remortgage their property every 2-5 years so the term will need to apply to subsequent mortgages as well.

Andrew Goodman
Osborne Clarke LLP

Thank you Andrew, I will bear that in mind.

Michael Cutler

Colemans Solicitors LLP

Thank you Andrew, I will bear that in mind.

Michael Cutler

Colemans Solicitors LLP

Previous Replies

You will presumably need to take into account that many people now remortgage their property every 2-5 years so the term will need to apply to subsequent mortgages as well.

Andrew Goodman

Osborne Clarke LLP

Interest free demand loan not repayable within fixed or indefinite term has an NPV of less than amount lent and is a transfer of value by trustees

Jack Harper

Jack

Many thanks. Does that apply even if the settlement follows the Kessler precedents, so includes the following power?

The Trustees may lend trust money to an Income Beneficiary. The loan may be interest free and unsecured, or on such terms as the Trustees think fit. The Trustees may charge Trust Property as security for any debts or obligations of an Income Beneficiary.

Regards

Michael Cutler
Colemans Solicitors LLP

Having the power is one thing. Tax follows what they actually do.

A loan repayable on demand interest free is not a transfer of vale because the value of the repayment is the same as face value. A fixed term loan at a market rate of interest is the same.

But an interest free loan repayable on a fixed or indeterminate date has a net present value of less than the amount lent and the difference is the value transferred. The same where the interest rate for such a loan is below market.

Trustees need to ensure they have power to make any of these loans but even so tax consequences follow if they do

regards

Jack Harper

My understanding is that HMRC’s view is that the making of an interest-free loan repayable on demand is not a transfer of value. This assumes that the repayment is for the full value of the loan.

Malcolm Finney