I have been asked by an IFA contact to comment on a situation he has encountered with a gift and loan trust. The trust was set up by the client in 2008 with a loan of £100,000 using the usual flexible trust deed provided by the insurance company. This expressly excludes the settlor from any benefit under the trust ( except for the repayment of the loan ). In 2010 the loan amount was waived and gifted to the trust. Unfortunately, in 2011 the settlor took capital payments from the trust totalling £10,000. My IFA contact is concerned that this may damage the tax planning exercise by resetting the 7 year transfer clock to the date of the subsequent payments to the settlor. Now that the error has been flagged up it is intended to repay the amount wrongly taken immediately.
Do Forum members agree this is just a genuine error that has or will shortly be rectified so that no lasting problems are created by the payments?