Interest on loans from NRB discretionary will trust

Background: Interest received from beneficiary A for a loan (property purchase) from a NRBT would incur tax at the trust rate and increase the size of the trust for IHT purposes. There is no specific clause relating to loans in the trust deed. The intended interest rate is below a commercial mortgage rate to to reflect that the loan is repayable on demand.

I have been asked whether it is acceptable for the trustees to, instead, extend an interest free loan to beneficiary A and to “make up for” this by accounting for the notional rolled interest when eventually winding up the trust, so as to treat all beneficiaries fairly.

My uncertainty is:
(i) might HMRC view the interest foregone as benefit to A that should be within IHT?
(ii) does this arrangement meet the trustees obligation to treat beneficiaries fairly?

Any views on this would be most appreciated.

I hesitate to opine, not being a lawyer, but these questions are interesting and merit careful consideration from trustees, of which I am an example.

I would observe that the ability to make a loan on terms other than strictly commercial depends on the powers granted by the deed(s). In an IIP, the trustees must look after the interests of both life tenant(s) and remaindermen. But in a discretionary trust, they have discretion (and therefore do not).

Is the obligation to treat beneficiaries fairly written into the deed? If not, and it’s only in a letter of wishes, then it isn’t legally binding.

If the trustees have the power and choose to exercise their discretion in that way, then it is up to them. Were I in their position, I would want to apply a value to the arrangement and take this into account, but on the basis of the information provided, the trustees may not be obliged so to do.