NRBDT on second death and value of loan

We have a fairly standard NRBDT set-up with a loan to the surviving spouse who has now died. The loan agreement provides for repayment on demand of the original debt indexed
in line with RPI, but the Trustees have power to waive all or part of the debt and/or any interest. The amounts involved would not justify an argument with HMRC about the taxation of the indexed increase, so we accept it will be subject to income tax.

If the Trustees waive all the indexed increase there will be a modest amount of IHT payable on the survivor’s estate, but if the Trustees claim all the indexed increase that
will take the value of the survivor’s estate well below the IHT threshold, and the indexed increase will all be subject to income tax in the hands of the Trustees at a rate of at least 20%.
** I realise we are only ever going to save tax on this amount at the rate of 20% - the difference between IHT and the basic rate of income tax (assuming we change the DT to an IIP prior to the debt being repaid) but it would be nice to save something
if we can.

Is there any reason why the Trustees cannot waive only so much of the indexed increase as will bring the value of the survivor’s estate below the threshold?

Taking this one step further, is there any reason why the executors cannot include the full indexed value of the debt in the estate for the time being and then the Trustees
waive some of it at a later stage, for example when we know how much the property is going to sell for?

I should perhaps mention that the executors and trustees could be the same people, but could also be slightly different if that was important. The beneficiaries of both trust
and estate are the same.

Diana Smart

Gordons LLP

I do not see why not, although HMRC would have to be told of a later waiver as it would affect the iht, but cannot the index linked element be advanced to a non tax payer?

Simon Northcott

You don’t specifically mention it but I am sure you are aware that since 17 July 2013 you can only get an IHT deduction in respect of a debt like this to the extent it is actually repaid post-death (s. 175A IHTA). I think you are right to wait and see where things end up from an IHT perspective before deciding how much of the loan should be repaid. If the property is sold at a loss you may be able to claim loss on sale relief and will not then need such a large deduction for the debt.
Paul Davies