Dear All, any thoughts on the following would be appreciated.
Proposal is as follows:
1 A to make an interest free loan (well under NRB) to B and take a 2nd charge on B’s property
2 A to then declare an IIP over the charge for the benefit of B and subject to that for other beneficiaries.
The intention is to help B whilst protecting funds from third parties, and for the purpose of IHT planning on A’s part.
My question is whether the sequence of events matters, i.e. taking charge first and then declaring trust, or declaring trust of the funds first and then trustees make loan and charge in their name
If the loan is not repayable on demand there will be a TOV: amount lent minus discounted current value of right to future repayment. It would be a PET;
Any lifetime trust is now an RPT, so the transfer of the receivable will be a CLT not a PET. The value transferred will be the discounted value of the loan at 1. above. The IIP will entitle B to any income but while the only asset is an interest free loan none will arise.
Apparently a full NRB is available and possibly annual exemptions.
The trust will have a full NRB unless the PET at 1. becomes chargeable when it will be reduced by the chargeable amount of it. The right of repayment will grow in value over time until repayment date, if the trust lasts that long.
Jack, thank you for your response. B intends to use funds towards the purchase of a property and the mortgagee requires any (gifted) loans to be repayable only on the sale of the property, so repayment on demand may not be acceptable.
A is content to let B decide when to repay. It is hoped that transferring the loan to the IIP trust for B should minimise any incentive for trustees (if A is no longer a trustee) to prejudice B’s interest by demanding repayment earlier.
Would it be better/less complicated to set up the trust first and for trustees to make the loan?
It changes the analysis as to who does what. The settlor will make a CLT of the money and the trustees would make a s.65(1)(b) depreciatory transaction with an exit charge. NRB presumably covering all though trustees have no annual exemption.
That route seems to me to have the advantage that the trustees have to accept the settled property as they find it (assuming that they accept office and do not disclaim it). This risks the trustees having to question whether they can properly make a loan on such terms unless the settlor ensures that the trust instrument expressly confers the power on them. A professional trustee might well not be content with that as there would still be a residual risk of breach of trust on exercising the power. If the loan is made by the settlor and the receivable is settled that is avoided.
I cannot see how a person can make a loan which has no repayment date. It may not be intrinsically unlawful. It may not risk being interpreted as a different legal animal e.g. a gift as long as the intention of the parties is made clear beyond peradventure. The trustees would need an express power to absolve them from calling it in if it was ever held to be a demand loan; if it was an express term that payment could not be demanded by the lender and there was no fixed or ascertainable repayment date, it would call into question whether it was juridically a loan at all, the borrower in practical terms being able to avoid repayment indefinitely, or by default was a demand loan or repayable on giving the debtor reasonable notice; difficult if the parties have stated expressly that it was not such.
No one can be certain that HMRC will eventually be required to opine, even if no initial query is raised when the CLT is reported and the exit charge is below the reporting threshold. There is something kamikaze about saddling the trustees with a creature that is not a conventional loan but some uncertain legal construct. All relevant current parties may be on good terms but the Law Reports show not only that this sometimes does not last but that the remaindermen to B’s IIP (identity not stated) may be minors or only be born later and become adults (and, worse, marry utterly terrifying spouses) who after B’s death will want to get their hands on the money from A or his estate. Certainty of terms limits the likely cost and personal animosity of such exciting encounters.
I wonder if it would be acceptable to the mortgagee to have a long stop repayment date set beyond the end of the mortgage term and if that would settle the question of the nature of the advance?
Thank you, Sonia, I think that may be possible by coinciding the repayment date with the end of the mortgage term, and giving B the option to repay sooner should B wish to.
This sounds like a plan. Presumably it would be intended ideally to discharge the debt out of the sale proceeds of the property so that a repayment date falling before the mortgage repayment date would be a nuisance.
The discount at 4% p.a. and a repayment date of 20 years from now is 54% so the NPV is 46% (both rounded). So assuming that rate is correct making an interest-free loan of £100,000 for 20 years creates a receivable worth now £46,000 and so a transfer of value by the lender of £56,000.
Thank you Jack for your helpful response. Repayment at the end of mortgage term should satisfy the mortgage lender as it does not jeopardise their security, as well as meeting their condition that the loan be repayable only on sale; if it took place earlier then indeed the loan will be repayable to the trust.