NRB Disc Trust - Equitable Charge - 10 year anniversary

Trusts Discussion
1

I appreciate this topic was discussed in 2017/2021. There seems to have been a difference of opinion and I would be grateful for current thoughts and/or experiences.

I have been asked if the trustees of a NRBDT should have paid IHT on the 10th anniversary in 2016 - sole asset an equitable charge for £275,000, subject to index-linking. Index linking would result in the asset exceeding the NRB by £32,225, equating to £1,933 IHT.

Should the trustees have paid this? If so, will they now incur penalties/interest for payment some 9 years later?

2

They should have filed a return regardless as the value was in excess of 80% of the nil rate band.
Whether the value was in excess of £325,000 depends upon its terms but it seems likely you would take into account the indexed value, in which case yes, tax would have been payable.
Tax will be payable with interest and HMRC could well levy penalties for late filing. Details are at IHTM36023 - Late accounts: penalties chargeable - HMRC internal manual - GOV.UK

It looks like they could be limited to £200 + circa £850 under s.245.

Whether HMRC will actually levy them is anybody’s guess but I suspect they usually will after such a long delay.

They should have also registered the trust under TRS, which should be first. I am not aware of HMRC levying penalties for late (but unprompted) registration.

3

Thank you Andrew.

Do you know if any guidance has been issued by HMRC as regards the indexed value having to be included, which I can refer the trustees/their accountants to?

The trustees had to pay income tax @ 45% when the equitable charge was repaid in 2020, to include index-linking. It does seem at odds to pay IHT on the 10th anniversary and then income tax 4 years later, resulting in double taxation - is any ‘offsetting’ allowable?

4

The trustees surely own 2 assets: an equitable charge confers a proprietary interest in the charged property on the person entitled to it and differs from an equitable mortgage where the equitable interest is assigned to the mortgagee by way of security. But there must be a second asset, a debt owed to the creditor or assignee entitled to the charge.

The value of the debt for IHT at any relevant time is the amount repayable, so with index-linking, discounted if not repayable on demand.

This illustrates the absurdity of HMRC’s position that the indexed amount is interest. Interest is a reward for the use of money by reference to time. Index-linking is designed to compensate the lender for the erosion of repayable capital principal through inflation.

“As any fule no”, apart from HMRC, the market rate of interest and the rate of inflation may be economically related but are not the same thing. If it were not so why was it that deep discount securities and loan relationships required specific legislation to tax debt principal which was otherwise capital at general law? Why do HMRC not seek to tax index-linking on gilts as income?

It is possible for the same sum to be taxed for more than one tax purpose, though often statute prevents it, see s37 TCGA. Does s.64(1A) IHTA help in an RPT? Does “income” mean taxable income or income for trust purposes? What is it for the special trust rate under s479 ITA which HMRC accept only applies to income for trust law and cannot normally be distributed as income (Brodie, Cunard, Stevenson v Wishart).

Regrettably HMRC are notorious for their intellectual dishonesty, being prepared to argue in correspondence, and even to instruct Crown Counsel to do so on his or her feet, whatever version of tax analysis suits them in one context and the total opposite in another. This is legislation by proclamation with the thinly veiled threat of resistance by endless litigation by a party that has an insatiable appetite for it and very deep pockets to finance it.

Mr James Kessler KC takes the view, in an appendix to his book on drafting trusts, that index-linking is not interest.

Jack Harper

So in my view

5

Trustees need to keep an eye on whether the value of the charged property is less than the initial debt, if it is a discounted part interest in a house for example, and how that value moves in line or not with the indexing debt.

Jack Harper

| jack jack harper
22 July |

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The trustees surely own 2 assets: an equitable charge confers a proprietary interest in the charged property on the person entitled to it and differs from an equitable mortgage where the equitable interest is assigned to the mortgagee by way of security. But there must be a second asset, a debt owed to the creditor or assignee entitled to the charge.

The value of the debt for IHT at any relevant time is the amount repayable, so with index-linking, discounted if not repayable on demand.

This illustrates the absurdity of HMRC’s position that the indexed amount is interest. Interest is a reward for the use of money by reference to time. Index-linking is designed to compensate the lender for the erosion of repayable capital principal through inflation.

“As any fule no”, apart from HMRC, the market rate of interest and the rate of inflation may be economically related but are not the same thing. If it were not so why was it that deep discount securities and loan relationships required specific legislation to tax debt principal which was otherwise capital at general law? Why do HMRC not seek to tax index-linking on gilts as income?

It is possible for the same sum to be taxed for more than one tax purpose, though often statute prevents it, see s37 TCGA. Does s.64(1A) IHTA help in an RPT? Does “income” mean taxable income or income for trust purposes? What is it for the special trust rate under s479 ITA which HMRC accept only applies to income for trust law and cannot normally be distributed as income (Brodie, Cunard, Stevenson v Wishart).

Regrettably HMRC are notorious for their intellectual dishonesty, being prepared to argue in correspondence, and even to instruct Crown Counsel to do so on his or her feet, whatever version of tax analysis suits them in one context and the total opposite in another. This is legislation by proclamation with the thinly veiled threat of resistance by endless litigation by a party that has an insatiable appetite for it and very deep pockets to finance it.

Mr James Kessler KC takes the view, in an appendix to his book on drafting trusts, that index-linking is not interest.

Jack Harper

So in my view