Waiving indexation on NRBDT by Trustees

Dear All,

I’m new to this site, it’s like a goldmine of information!

I have done so much reading and cannot seem to find an answer to a particular situation.
I have a NRBDT. Property was transferred to surviving wife subject to an equitable charge of £220,000 subject to index linking in accordance with RPI in favour of the Trustees, Standard stuff. There is power for the Trustees to waive interest/repayment.

It is more beneficial to my trustees and beneficiaries (all the same people) to simply waive the index linking and avoid paying 45% income tax (amounts to £46,000) and take the hit of the slightly higher inheritance tax (£34,000). I accept that in deducting the liability from wife’s estate i can only deduct the original equitable charge NOT the index linking due to IHTA s 175a. By reason of not claiming the index-linking i am pushing the wife’s estate into being taxable to IHT, but as i say, ultimately there is a saving to be had. (i shall do some investigations into whether the beneficiaries are basic rate tax payers and this may have an impact).

My concern is that i do not want to inadvertently get caught by the IHTA s175 (2)(b) which talks of securing a tax advantage. Example 1 on HMRC manual relating to Liabilities: restricted deductions etc is not clear.

In short, can i simply advise the trustees to waive index linking and thereby deduct only the loan from wife’s estate and pay IHT accordingly. Avoid income tax altogether.

Grateful for the assistance.

Gurvinder Sehra
KR Solicitors

You should be safe to proceed as you suggest, in fact what you are proposing is fairly standard practice since HMRC take the view that the indexation element is subject to income tax (there is a contrary argument).

Section 175A(2) is not as clear as it could be. It would cause you a problem if you were trying to get an IHT deduction for the indexation element. Since you are not trying to do that it can be ignored.

Paul Davies
Clarke Willmott LLP

Thank you Paul.


Gurvinder Sehra
KR Solicitors