Loan from Discretionary Trust and 10 Year Anniversary Charge

Trusts Discussion
1

I have the scenario where a Discretionary Trust is being set up by DOV. The value of the Trust is £500,000 and it is intended that the whole value be loaned out to one of the beneficiaries such that there are no funds within the Trust; only a loan. When the 10 year anniversary comes up, is the value of the loan treated as an asset for the purposes of calculating the anniversary charge which will result in tax to pay or can the loan be deducted meaning there is no tax to pay? I note we would need to report in any case given the value but if tax is going to be payable we will need to retain some funds for this purpose or we may restrict it to £325k.

Is it better if there is going to be tax to pay at 10 years where the full £500k is invested, to create more than one Discretionary Trust by DOV?

Any thoughts are welcome.

2

The loan will be an asset of the trust that will be subject to IHT at the 10-year charge. There is no loan to deduct as it is an asset of the trust.

You cannot get around this by creating more then one trust under DOV as any trusts created on death will be related and will share any nil rate band (that is available).

By restricting to £325,000 you will avoid this problem (assuming no lifetime transfers into trust were made in the seven years prior to death).

3

Thank you for your advice.