Interspousal loan and income tax

H makes an interest free loan to W, who invests it in an income producing asset. Is the income taxed against H?

Simon Northcott

Arguably yes, because the interest free loan is a gratuitous arrangement, which therefore falls to be treated as a ‘settlement’ for income tax purposes. In practice who would think to treat it this way?

Paul Davies
Clarke Willmott LLP.

Dear Simon,

Gifts between spouses are exempt for all forms of tax so income will be chargeable on W.

Lucy Orrow
Lambert Chapman LLP

ITTOIA 2005 s 626 seems to be irrelevant (ie offers no protection as no “outright gift”).

I suspect the answer is that income arising from the loan proceeds is for income tax purposes that of H.

H retains an interest in the settlement (ITTOIA 2005 s 625) due to the lack of commerciality with respect to the loan (ie gratuity/bounty is involved). Presumably if the loan was made at arm’s length (eg market rate etc) then the settlor would not possess an interest in the settlement (but see ITTOIA 2005 s 633).

(Jenkins v IRC (1944); IRC v Levy [1982])

Doesn’t seem a good idea in view of likely HMRC attack.

Malcolm Finney

I had a feeling that the settlement provisions applied but could not find the statutory authority.

I can see why hmrc would argue the toss as it is a form of income shifting

Simon Northcott

Would making a gift rather than a loan be more certain?

John Mather
Stanbridge Family Office Ltd

Hi Simon,

No tax implications for the husband, he can gift or loan assets with no CGT or IHT implications. Income tax is paid on receipt, you’re able to repay the income back to the husband if required.

Loan or gift is immaterial as Lucy suggests.
Income tax is paid by the recipient.

Richard Bishop