Loan to beneficiary treatment in the winding up

Trusts Discussion
1

Hello,

I have a will trust which was created in 2012. All assets settle in the Trust (around 900k) has been from the estate. In 2016 Trustees lend all trust funds to the beneficiary.
Now Beneficiary and Trustees want to wind up trust and my question is:

  1. what will be treatment of this loan?

Many thanks for help

2

I see that this has not been answered and as my wife and I have similar Wills, which allow Trustees discretion to lend the NRB allowance gifted into Trust on first death to the surviving spouse, repayable on demand without interest, the correct answer would be of interest.

My contention being that if the loan was on a no interest basis, then there is no income or gain to the Trust and therefore no tax.

If the settlor still lives, then the loan would change to a gift from the Trust and may be taxable. However if the settlor has now died, then the Trustees can simply consider the loan as part of the settlement meant for the beneficiary originally.

I hope to see other other replies to this question.

3
  1. Yes, if the sum repaid is the same as that originally lent, there should not be any IT or CGT.
  2. If the trust is a will trust, how can the settlor be alive? The trust is established on their death. I don’t really understand your third paragraph.

Further, if your wills were prepared before the introduction of the transferable nil rate band in 2008, you should have them removed. While there are still some situations where a NRB will trust is useful, they may be unnecessary for the majority of individuals.

4

It is confusing. As you say a Will trust of 2008 would mean that the settlor has died, or as I suspect, the Will Trust has possibly been replace in 2012 by a Loan Trust which the Trustees now wish to wind up?

In the later case, another question comes up regarding any chargeable event since 2012 regarding tax accounting by Trustees

Can you clarify this please Peter?

5

A Will Trust only becomes ‘active’ on the death of the testator/settlor.

A Loan Trust (and I assume you mean a trust typically offered by a life assurance company to hold an investment bond) becomes ‘active’ when the trust deed is executed.

A Loan Trust could be brought to an end by surrendering the investment bond and repaying the loan. The net proceeds would then be distributed to the beneficiaries (depending on the terms of the trust).

Assuming this is not a Bare Trust, the tax charge on the investment profit falls on the settlor ( whilst alive and UK resident).

Other strategies are available - perhaps the loan could be written off and the bond assigned to the beneficiaries as joint owners.