Say for example, a couple have two children. They make mirror wills leaving (almost) everything to their two children and issue in DT.
On parents’ passing, the trustees loan everything out of the trust for life interest free to the two sons.
Am I right that:
(a) This will reduce the IHT liability on the sons’ estates (provided the loan is secured and/or repaid in full); and
(b) remove the need for trust returns given that the trust will receive no income?
I believe the absence of interest on a loan counts as a benefit to the beneficiaries that should be included as income for their own income tax purposes. The value of the benefit for the r185 form in such a case being equal to the amount of interest at commercial lending rates on a similar loan i.e the interest they’ve not had to pay.
I do not believe there is a taxable benefit. This would only be so if the employment income rules applied or those concerning capital gains of NR trusts or income chargeable under the transfer of assets abroad rules.
Unless the loan is repayable on demand (awkward for the borrower, so needs thinking through) an RPT will suffer a depreciatory exit charge, which will not matter as long as the trustees have a full NRB. In that event there would be no TYA charge either as the loan will not grow in value.
Jack Harper
Thanks. That’s what I thought. Am I also right in my belief that if all the trust monies are loaned out to the beneficiaries on this basis that there is also no need to do yearly returns given there is no income?
Do you have any authority for that belief? If the trustees purchase a property for beneficiaries to live in there would be no income tax charge despite the obvious enrichment of the beneficiaries. Don’t see why there should be if there is a loan.
I’m only basing on CG38654 - Capital payments – loans – from 6 April 2017 - HMRC internal manual - GOV.UK
Jack is likely to be authoritative on the substantive point. He usually is!
That section of the manual concerns Capital Payments under s.97 - and is only relevant to non-resident trusts.
Thanks. I can see it is only with reference to non-resident DTs, but that’s worth knowing.
Be interested in the answer to whether there is a ln HMRC proforma available for the periodic recording of loans to beneficiaries (Similar to the R185 form for trust income for a beneficiaries) even though an annual tax return isn’t required.