I have a client who set up 2 discretionary loan trusts for a value of £400,000 each. These were set up on different days therefore I believe that the Rysaffe Principle applies. As these were loan trusts there was no initial chargeable lifetime charge as the value of these loans will still be included within our clients estate on death.
The first 10 year anniversary of these trusts is in the upcoming months and the value of these trusts are now currently around £600,000 and £650,000 (including the initial loan of £400,00 each). As the total value of each trust exceeds 80% of the nil rate band I believe that there will be a reporting requirement?
Am I correct in thinking that because these trusts were set up on different days that they will each receive a nil rate band (NRB) to be allocated against the growth in capital - i.e for Loan Trust A £600,000 less the loan of £400,000 less NRB £325,000?
I am aware that in calculating any liability you must include chargeable lifetime transfers (CLT) seven years prior to the trust. The client has not made any transfers other than those into the loan trusts. In calculating the charge for Trust B I assume that there not be anything I need to include for CLTs as the transfer into Loan Trust A will not have been a CLT. Can you please confirm that my understanding is correct?
Based on these values I therefore do not think there will be any IHT liability, just a requirement to report the information to HMRC.
As the trusts were set up on different days, they will indeed each have a separate nil rate band for the purposes of calculating the periodic charge, unless they are caught by the same day addition legislation in section 62A IHTA 1984. This might happen inadvertently
if the settlor waives the loans on both trusts on the same day, for example.
Provided that the loan agreements established that the loans were repayable on demand, there will have been no transfer of value and, hence, no CLT.
Bizarrely, although you are allowed to deduct the outstanding balance of loan when calculating the value of the trust fund at a ten-yearly anniversary in order to determine whether there is a periodic charge, the loan cannot be deducted when determining whether
the reporting limit has been breached. This is confirmed at IHTM06124. This appears to be based on regulation 4 of the Inheritance Tax (Delivery of Accounts)(Excepted
Settlements) Regulations 2008, where sub-regulation 4(5) includes the words “without deduction for liabilities.”
As long as the trusts were set up on different days, and as long as the client hadn’t made other chargeable transfers, you are correct in your assumptions.
As the trusts were set up on different days, they will indeed each have a separate nil rate band for the purposes of calculating the periodic charge, unless they are caught by the same day addition legislation in section 62A IHTA 1984. This might happen inadvertently if the settlor waives the loans on both trusts on the same day, for example.
Provided that the loan agreements established that the loans were repayable on demand, there will have been no transfer of value and, hence, no CLT.
Bizarrely, although you are allowed to deduct the outstanding balance of loan when calculating the value of the trust fund at a ten-yearly anniversary in order to determine whether there is a periodic charge, the loan cannot be deducted when determining whether the reporting limit has been breached. This is confirmed at IHTM06124. This appears to be based on regulation 4 of the Inheritance Tax (Delivery of Accounts)(Excepted Settlements) Regulations 2008, where sub-regulation 4(5) includes the words “without deduction for liabilities.”