I realise this has been discussed extensively but cannot find an answer to whether Trustees can waive the indication, where there is no express power, without it being a breach of their duties?
In this case we have a £234k loan from 2002 when Mr X died. Mrs X has now died (taxable estate) and with indexation we would be looking at a huge income tax bill plus IHT on termination.
The discretionary beneficiaries are the same as the beneficiaries under Mrs X’s Will (50/50). One beneficiary lives in the uk and is a higher rate tax payer. The other lives abroad and suffers from severe mental health difficulties but has capacity to manage his affairs - I’m not sure, however, that he would cope very well with a complex personal tax position.
It seems to me that if the Beneficiaries wish to ask the Trustees to consider winding up the trust and splitting everything 50/50, and they agree to do so - then waiving the indexation is in the interest of the Beneficiaries, so is not a dereliction of their duties.
I do not believe the trustees can waive it unless they have power to do so. HMRC’s purblind attitude to it means that if it is income it ought not to be subject to IHT RPT charges. Of course they might run the perverse argument that its entire net present value is a capital asset, ridiculous where the indexation will be income (so they say) when it falls due and payable. The counter might be that receivability without receipt is a nothing, which has a traditional appeal to the judiciary. However, the argument that the value of the debt is the total amount repayable net of income tax on the indexation and discounted for deferred receipt is hard to resist.
If you wind up the trust, unless you can be confident that the principal plus indexation to date net of income tax (discounted for deferred receipt at the due and payable date) is within the trust’s nil rate band you will have to confront a RPT IHT charge or at least perhaps an argument with HMRC. The actual amount payable might not be great.
The trustees could make an appointment of all the trust capital to several beneficiaries or just the 2 identified all of whom are adults with capacity but retain a discretion over their respective shares. A revocable appointment would further emphasise that the trust remains in being. They could then authorise the trustees to waive by deed and indemnify them.. The trustees should be able to rely on ss 61 and 62 TA 1925 and the indemnities given. Depending who the other discretionary objects are, if any, there may be no one with standing to sue and a disappointed object usually has a weak case anyway.
HMRC cannot overturn a valid trustee action in breach of trust but they have standing to argue that it was void, which it might be. Hard to know their likely attitude so this leaves an inevitable degree of uncertainty. A hard look at the NPV of the indexed debt and its relationship to the trust’s NRB might be an idea; if it can be distributed with no or minimal tax the beneficiaries can certainly waive the indexation.
Once the indexation has been waived the trust can be wound up but while presumably the NRB will cover the value of the principal it does not in itself extinguish the debt. The winding up will have to be achieved by distributing the debt to the beneficiaries. How that is handled depends on whether there are funds to repay it or whether it is charged on other assets. The trustees are the creditor but there must be a debtor, not stated in the OP but possibly Mr X or Mrs X or a beneficiary under the will of either. It even seems possible that the debtors are ultimately the same persons as the beneficiaries of the NRB DT. Waiving the principal itself would be an omission by the trustees within s3(3) and an RPT chargeable event but perhaps within the trust’s NRB. The value if distributed would be the same. In each case the value of debt must be discounted if it is not due and payable for some time yet. If the debt is appointed to the beneficiaries, they can release it using their own NRBs. If it is not simply repaid.
I am aware that none of this is going to be easy to explain to the beneficiary with impaired capacity and the solution that requires his minimum involvement will no doubt be favourite. If it were not for that there might be mileage in considering his residence, local tax exposure and Treaty applicability and whether the indexation “income” could be made tax-free. It cannot surely be regarded as interest from which UK tax is deductible even if the debtor is UK resident (SAIM9090). It surely must be disregarded income as, if it is income at all, it must be interest and so within s825(2)(a) ITA 2007. Presumably the payer is not going to get a deduction in the UK so the asymmetry while not completely deterring HMRC may curb their enthusiasm to quibble. His country of tax residence might not treat the indexation as taxable income.