Value of loan from Estate to Will Trust

Trusts Discussion
1

I have a client, X, who passed away three years ago. X made a loan to company two years prior to death. The company fell on difficult times and at the date of death the company would not have been able to pay back the loan (max 25% if the company had been liquidated at the time of death).

Executors are in discussion with HMRC to agree loan value at 25% however should the fortunes of the company improve then more of the loan would be repaid (it could be ten years before any of the loan is repaid). There is however no guarantee the fortunes would improve.

The loan is to be transferred into X’s will trust and potentially out to beneficiaries.

My question is this, if the loan is agreed at 25% with HMRC but then more than 25% is repaid, would the increased amount be dated back to X’s estate with tax at 40% plus interest or would it be in essence treated as an investment and thus any increase on the loan is a capital gain? A third option may be that the additional amount is deemed to be loan interest?

I appreciate any opinions on this.

Luke Pickering
Thomas Coombs

2

For IHT presumably IHTA 1984 s. 160 provides that it is the market value of the loan at the date of death which is brought into account.

Later repayments are not then brought into account for IHT.

For the trustees of the will trust they acquire the rights to any future repayments. However, any future repayments appear to be both contingent and unascertainable and thus for CGT are not repayments of debt. The repayments constitute the disposal of a chose in action (acquired by the trustees) and thus on repayments a CGT charge may arise.

Malcolm Finney