Estate Distribution and Gift and Loan Trust

Hi all,

Deceased left a homemade Will which gave a ‘sum equal to the IHT threshold, including any transferred threshold’ to her 6 children in equal shares. If the value of the Estate is more than the available threshold, the remainder is to be split between 5 charities.

Deceased had a Stirling Investment Bond, which was a Gift and Loan Trust. Value at death was approx£70k. The initial loan element was £46,000. The Executors have waived the right to repay the loan to the estate, but of course is treated as an asset for IHT purposes. No IHT due, value of estate is over £950k which is the amount of available allowances/threshold. Charities likely to benefit.

Question is - when distributing the Estate, as executors have waived loan element, does the amount the non-exempt beneficiaries (children of deceased) are entitled to reduce by the £46,000, therefore leaving £904,000 available? Any guidance would be appreciated.

Abby Young
Carter Bells LLP

On what authority did the executors waive repayment of the loan?

It seems to me that unless they have authority in the will, or the waiver was authorised by the beneficiaries, the executors are liable to restore the estate from their own funds.

The charities are unlikely to have been able to approve the waiver without Charity Commission approval and, if authorised by the children, will likely be a transfer of value by them for IHT purposes.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

It would be useful to know on what basis the executors concluded that they were allowed to waive the debt owed to them by the trust. Doing so would reduce the value of the estate and, consequently, the amount available to the beneficiaries of the estate. It sounds as though none of the beneficiaries consented to this, which makes me wonder why the executors considered that they could it.

Paul Davidoff
New Quadrant Partners

Following on from the comments from the two Paul’s on this thread, (that the executors cannot waive the debt without express power to do so) is there any reason why a Will should not expressly give the executors power to waive the debt in respect of a loan trust? And if it does, and they do, what would be the tax consequences? I appreciate that the debt would still be an asset of the estate at death for IHT purposes, but would the waiver by the executors constitute a chargeable transfer of some sort?

I have seen comment in the guidance of some providers of these schemes suggesting that the Will itself might waive the debt, but not that the executors should simply be given power to do so. What I mostly see, though, is cases where the issue of what happens to the debt on death of settlor is simply not addressed.

Diana Smart
Gordons LLP

As identified by Diana, a will can provide for the waiver of a debt and, where it does, the debtor is effectively receiving a cash legacy for IHT purposes which is set off against their debt.

Where the debtor is the trustees of a settlement, the testator will be a settlor for taxation purposes in respect of the amount “written off”. If they were the original economic settlor of the settlement this should not normally create additional complexity.

Where the debt is repayable on demand, the value of the legacy will usually be equal to the value of the debt. However, if interest is accruing on the debt and/or it is repayable at some fixed time in the future, I understand that the value of the debt, and thus the amount of the legacy, as at the date of death for IHT purposes may not be the same as the actual amount “written off” by the executors.

If a will merely gives the executors a power to waive the debt, it has previously been suggested to me that this results in the beneficiaries otherwise entitled under the will (usually the residuary beneficiaries) being deemed to be making a transfer of value and, where the debt was repayable by the trustees of a settlement, the settlors into the settlement of the value of the debt so waived. On that basis it would seem cleaner, and less prone to unexpected consequences, for a will to provide a specific direction, rather than a mere power.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

I agree with the guidance that you have read, that the debt could be waived by the Will itself, which would be a legacy, like any other.

If the Will gave the executors the power to waive the debt, you would probably want s144 IHTA to apply to the debt asset. For s144 to apply, there must not have been an interest in possession before the exercise of the power. Whether there was an IIP in the debt asset will turn on the drafting of the Will. To be on the safe side, it would seem sensible to draft the Will expressly to avoid any IIP arising over the debt until the power to waive the debt has itself been waived (or any specified time limit for waiving the debt has passed).

If there was already an IIP (most likely an IPDI), it would seem that there would be a chargeable transfer, with the person entitled to the IIP being the IHT settlor, which could be problematic if the value exceeds the NRB or if that person is also a beneficiary of the loan trust.

Paul Davidoff
New Quadrant Partners Ltd