Bridging loan by life tenant

I am advising the trustees of an IPDI property trust. The life tenant wishes for the current property to be sold and a replacement property purchased. However, having found the desired property and with consideration that the the current trust property may take some time to sell, it has been proposed that the life tenant makes a bridging loan to the trustees of the IPDI trust to facilitate the purchase which is then repaid on the sale of the trust property. I am conscious that if the loan is not on commercial terms, there may be tax consequences with life tenant treated as a settlor. Any comments gratefully received.

I am not sure that there should be much of a tax issue here. I presume a demand loan interest-free would be in order, which would probably deal with income tax. A fixed term loan interest free might create a TOV for IHT but not of much an amount if it was short term and that could be avoided by paying a commercial rate of interest, though unattractive because income taxable to the lender but not deductible to the borrowers.

As the question acknowledges, the loan could be the making of a settlement and the lender a settlor for income tax e.g. a demand loan interest-free. It is arguable that that this transaction overall does not contain the essential “element of bounty” because the lender being also the life tenant was either better off or no worse off. This was the decision in IRC v Levy, dependent on a finding of fact, but potentially analogous in my view. Levy did not therefore go on to decide whether the lender as settlor retained an interest (the repayment) or whether any income arose under the settlement. Even if the lender here was a settlor who retained an interest he would be a separate settlor of a separate settlement, under ss644 and 645 ITTOIA 2005, and taxable only on any income derived from short term deposit of the funds lent as settlor so not also as life tenant. No big deal as paid by a third party.

It could also be a settlement for IHT which follows a similar approach and the settled funds would be small. It would also be a “gift” for a102 FA 1986 (even though not a TOV) and arguably a GROB which ceased on repayment with a PET by the lender. And constituted another PET by the lender as life tenant under s102ZA! It would be absurd for HMRC to argue that a lender’s right to repayment involved a reservation in the actual funds he lent. If that is accepted then what is the “property subject to a reservation”?

What if the life tenant dies before repayment? The loan would be deductible for IHT despite s175A and despite s103 FA 1986 as long as it was repaid after death out of the trust funds and the lender did not think it a bright idea to make a lifetime PET/CLT of the receivable. The risk goes away altogether if repayment precedes the life tenant’s death, so short term life assurance might be a plan unless the risk is acceptable compared with the cost and hassle. I suppose there is theoretically also a possible risk of a PET under s102ZA(2) for 7 years but I trust that even a judge would be able recognise that as nonsense on stilts if HMRC claimed it.

Jack Harper

Hi there. On the topic of bridging loans, Id suggest seek expert advice from a bridging finance specialist in advance so you are fully aware of the benefits, risks and potential pitfalls. A very useful article here to provide some insight: Bridging Loans For Auction Properties: A Comprehensive Guide 💵🏠