Mr F died in 2005, and as was common at that time, a Deed of variation was effected to create a NRB discretionary trust. Mrs F and son were appointed as trustees
A Deed/Loan note was also created alongside the deed of variation with Mrs F giving a binding promise to repay on demand.
As a result nothing (cash or otherwise) went into the NRBDT following Mr F’s death.
Mrs F died in early March this year.
The drafting of the loan note refers to the incorrect sections of the deed of variation, but it looks as though the relevant clause that it should have referred to states that the loan is repayable on demand, but the trustees are not obliged to call in the loan at all.
Mrs estate will have her NRB, and RNRB only and will therefore be taxable, unless the loan note would be considered a debt of her estate in which case there would be no IHT payable due to the debt to the trust. However, I am concerned whether HMRC would accept this given there is no requirement for the trustees to call in the debt.
Another wrinkle is that the only remaining beneficiary of the NRBDT is the son. So I believe a replacement trustee would need to be appointed, for the trustees to then call in the loan, and ideally from there appoint out of the trust and wind down the disc trust early?
It seems you are stuck with the DT and the loss of any TNRBs. Despite the wrong reference in the loan note there seems abundant evidence that a genuine loan was intended by the parties. Subject to the actual wording it seems likely that the further intention was to create a loan repayable on demand but to treat the trustee lenders like an absolute owner by giving them an entirely free choice about whether to make any such demand, so that they would not be bound to call it in and obtain a better return for their beneficiaries (you do not mention interest or other terms). If Mrs F was an eligible beneficiary, as I would expect, they might have been fully justified in lending to her on very favourable terms in any case but the specific power avoids any doubt.
IHTM28321 onwards indicates that HMRC’s main concern is likely to be that the loan was bona fide and legally enforceable, of which yours seems to have ample evidence.
It is also essential that the debt be repaid out of the estate under s175A IHTA. That could be achieved by distributing the debt to the son, who is presumably an eligible beneficiary. A short legal assignment in writing, under hand is sufficient, with notice from the trustees (i.e. the son) to the executors of Mrs F (even if they are the same person(s), their capacity is different). The son can then set off his right to the debt as creditor against his entitlement to the estate and that is discharge by set-off, so within s175A. The son should have authority under the trust deed and general law as a sole trustee to deal with a thing in action like a debt unilaterally.
Presumably the value of the debt was and has always been below the NRB amount so there will be no RPT IHT charge on distribution of the debt. Accrued interest would not affect that but would have to be waived by deed if the trustee has power or otherwise paid and taxed. In fact the debt is assigned with interest accrued it could probably just be ignored by agreement as long as a deduction is not claimed in the estate. The value of such a deduction may be less than the income tax.