I have been asked to prepare a DoV by a company we assist with reserved work. They in turn have been asked to facilitate this by one of their IFA partners.
Proposal
Daughter (D) of deceased to execute DoV to pass £150K absolutely to her own daughter. £300K on DT which is loaned to D interest free so will be debt of her estate.
I understand the thinking, but will it actually work? It seems too contrived and too good to be true.
Thoughts appreciated as always.
Not my area but I’ve added some thoughts for the purposes of discussion…
The objective of the arrangement seems to be to (i) allow D to give up £300,000 but end up still be able to use the £300,000, and (ii) prevent there being a CLT / IHT on death being due in respect of the £300,000 cash that eventually ends up in the discretionary trust when the loan is repaid. Is that right?
The idea behind 142(3) is to stop a DOV working if “consideration in money or money’s worth” is given.
It sound like the interest-free loan from the trust is consideration (consideration being given its ordinary, every day meaning of giving something in exchange for something else or a quid pro quo).
The question then is whether the making of the interest-free loan is money or money’s worth. That’s where I am less certain. If the loan is a term loan then I think I’d be happy that the interest forgone over the loan term would be money’s worth. This is because the money could be on lent for a profit (put in a fixed rate savings account, for example) and so be capable of being converted into money (or something of direct monetary value to the individual).
I am less certain that a loan repayable on demand would be money’s worth, provided that it is clear that the borrower could immediately repay the loan. I don’t think drafting the loan agreement as repayable on demand would be sufficient to show the loan is actually repayable on demand (e.g. there might be arrangements behind the scenes that mean that the trustees are not expecting to demand repayment of the loan until D dies).
Let’s pretend its not within the scope of s142(3), the objective of the arrangement might be to allow D to keep control of the £300,000 cash and prevent a future IHT charge when the cash would otherwise be paid to the discretionary trust. I know very little about the IHT DOTAS hallmarks but wonder if someone might describe setting up a trust with an interest-free loan back to the original beneficiary (perhaps dancing around to make sure that the loan is repayable on demand to prevent s142(3) applying) is a bit contrived. If so, is this a notifiable arrangement?