I am acting for a client who is a Trustee of a Discretionary Trust set up by DoV in 1997 in relation to her late brother’s estate. She is named as one of the potential beneficiaries, as is her children, who are also now Trustees.
The trust holds about £115,000. She would like the Trust to loan her and her husband £100,000 for improvements to their property and I have suggested that she does so by way of Equitable Charge over their property. The loan would be indexed linked and repayable when the second of them dies.
Does the Trust need to expressly stipulate that the Trustees are able to transfer trust assets to a potential beneficiary, in exchange for a loan due back to the Trust, in order for them to be able to do so? I should mention that the husband is not named as a potential beneficiairy.
What are the tax implications, if any, in doing this?
Trustees are unlkely to lack the lawful vires to make a loan of this kind in principle and may well be able to properly make it to an eligible beneficiary on favourable terms. That is important for IHT purposes as a below-market terms loan would be a RPT chargeable event under s65 (1)(b) IHTA. Given the value of trust property this might be charged at a nil rate, subject to the settlor’s cumulation if any. It could well be non-reportable under the Excepted Settlements SI.
Index-linking is a potential issue due to HMRC’s intellectually dishonest stand on income tax. If the loan is interest-bearing at an appropriate rate, and the index-linking is to a good chap recognised index, repayment of the indexed loan should not be taxable income to any extent. HMG issue gilts on this basis and HMRC accept the position but then HMG as the wage-payer are personae gratae at the Lubyanka in the Strand whereas Joe Taxpayer is a devious swine. As no deduction will be available to the borrower (how HMRC do love asymmetry when it favours them!) a successful challenge by them on the grounds of partly disguised interest may be an unbudgeted cost. Whatever terms the parties have in mind need to be benchmarked to at least predict the worst view exposure. Again the trustees may have the power to waive the index-linking before it falls due, subject to s.65 again.
Remember that HMRC have no concept of materiality and if the repayment does not positvely attract their attention in the event the trustees may be uncomfortable about a possible discovery for up to 20 years in theory. Family trustees may enjoy and deploy the conscience of a well-trained Hippopotamus but professional trustees will be bedwetting about the PCRT and, if solicitors, the Cube, and so may feel obliged to dob themselves in and get HMRC’s case-specific view, in order to preserve their integrity and their livelihoods. I know since I’ve been in their shoes and it can be like cold sick over client relations. You might be forgiven for thinking that our main duty was to our client but that halcyon era is gone. Now it’s Sauve qui peut.