I would be most grateful for your views/guidance on the following:
I have a client who is Executor of his late father’s estate as well as a trustee and potential beneficiary under a discretionary loan trust together with his sister. His late father was the settlor of the loan trust which holds an offshore bond.
The loan trust has an outstanding loan of £150k, which had yet to be settled at the point of his late father’s death. Residuary beneficiaries of late father’s estate are client and his sister (49.5% each) with a charity due to receive 1% of the estate.
The Will makes no provision for dealing with the outstanding loan.
The client would like to deal with the outstanding loan, so that we may consider options regarding the ongoing management of the trust and progress his personal financial planning. I highlighted that his options are either to:
Repay the outstanding loan to the estate (though this is likely to give rise to large tax liability as it would be necessary to encash a large portion of the OSB).
Waive the loan to the trust with the consent of the residuary beneficiaries.
Deed of variation.
Given the tax liability under 1), it seems that 2) would be the easiest option here. However, the charity in my view are unlikely to waive their entitlement under the loan. Is it possible for the trustees to settle the charities’ 1% share of the loan i.e. £1500, and then the client and his sister waive their own personal entitlements using a Deed of Waiver? (provider has a template deed of waiver that seems suitable in this case). Is this the best way to approach waiving the loan?
If the loan is not dealt with by the Will, then it forms part of the residue of the estate.
The trustees will need to repay the outstanding loan to the estate, depending on the value, by full or part surrender. The excess of the loan continues to be held on trust for the beneficiaries.
Many thanks, the loan is not dealt with by the Will.
I was under the impression that the residuary beneficiaries could waive their entitlement to the outstanding loan using deed of waiver?
If this is not possible could the loan be assented to them and then waived? They will pay a substantial amount in tax if the bond is encashed to repay the loan.
My understanding is the loan must be repaid to the estate as its chargeable to IHT.
By will - the loan can be assigned to Spouse/CP. Exempt transfer. Any assignment by will to the children would be a chargeable event. As would a gift of the loan.
The waviers for the providers I use must be signed by the settlor. Who obviously now, is deceased.
The trust deed would not allow powers of wavier of the loan to the trustees or beneficiaries. It would be poor drafting it did!
I’d talk to a tax expert about encashing. Might be some creative ideas. Depends on 5% taken etc.
I think Standard Life let the executors waive the loan in the place of the deceased settlor. I shall see what they say in any event.
Unfortunately, it’s an offshore bond, so seems very little planning can be done on the tax front other than to draw down the unused 5% allowances and surrender segments.
In real terms as the will does not direct an assignment or gift - from the grave - you are limited to the trust deed. As you suggest the Standard Life trust deed may have specfic clauses allowing wavier (by other parties), of course these ought to be condisered.
The charity is seemingly entitled to 1% of the estate rather than 1% of the loan. Can the executor satisfy the charity’s entitlement from other assets? Even if a part surrender of the life assurance bond was needed to achieve this the tax consequences would not be horrendous. The ‘main’ beneficiaries could then waive their loans.
Richard, you state that any assignment of the loan to the children would be a chargeable event. Is that correct? Chargeable to what? I am aware that if the loan is waived in connection with the assignment of the bond it will trigger a chargeable event in relation to the bond, but I am not sure what the chargeable event would be if the loan is simply assigned by the executors to the beneficiaries of the Will.
I would have thought that options include:
Executors assign the benefit of the loan to son and daughter equally in part satisfaction of their entitlement to the estate (with the charity receiving its 1% from other assets).
Assignment as above followed by gift (possibly by deed of variation) of the benefit of the loan to next generation if required.
In either case I believe the new beneficial owner of the debt can continue to draw down the loan as the father presumably did, using the 5% withdrawals, until the loan is repaid in full. I refer to assigning the benefit of the loan rather than the loan itself, as I recall there is some difficulty in splitting the legal ownership of a debt.
Chargeable transfer on the settlors death - Not applicable anyway as it’s not dealt with by the will in this case.
See - Link - Loan trusts (abrdn.com)
" Gift loan to someone else, such as an adult child. Again, this would be a chargeable transfer on the settlor’s death."
I do not agree the loan can be assigned -
“If the outstanding loan is not specifically dealt with in the lender’s Will, it forms part of the residue of the estate. This will normally mean that the trustees will need to repay the outstanding loan to the estate and some or all of the bond will be surrendered. Any value in excess of the loan continues to be held on trust for the beneficiaries”.
Thank you Richard, for the link, which is helpful. There is an article on the CII website here https://www.cii.co.uk/learning-index/articles/the-consequences-of-the-death-of-the-settlor/46264 which whilst a few years old is also helpful, and which is expressed slightly differently. In the section under the heading “Death of a settlor under a Loan trust” the writer expressly contemplates the option of assenting the benefit of the loan to the beneficiaries of the Will.
I feel that the references in your link to a chargeable transfer may confuse the issue, because I believe they refer simply to the fact that the debt is an asset of the estate, and unless left to an exempt beneficiary, there will be IHT to pay on that value on death, just as any other asset. There will be no further chargeable transfer on an assent or assignment of the debt to a beneficiary under the Will.
In short, I feel that the benefit of the loan is simply another asset of the estate, to be distributed accordingly, provided of course that it is not needed to meet estate liabilities, and for example, that any IHT due on death can be paid from other assets of the estate.
Thanks Diana, I agree. I think the Standard Life article implies waiving the loan is a potentially chargeable transfer to IHT rather than a chargeable event and assent of the loan would seem to be the best option in this case given there is no need for the loan repayment to settle IHT liabilities or to pay specific legacies.
The 1% of the estate due to charity can be settled from other assets.
Next question, how does one go about assenting the loan? Presumably a document needs to be drawn up by the executors and agreement from the trustees is required. I’ll see if Standard Life have a template but suspect unlikely.
Adrian, as you say, I think it unlikely that Standard Life will be able to provide a template. I have done it once in the past and prepared a simple deed of assignment of the debt, reciting the background, but I recall it was largely free drafting.
The practical problem is whether or not the PRs can pay tax and admin expenses without seeking repayment of the loan. The charity’s share of residue is 1% of the estate which is 1% of the loan and worth £1500, so the loan is apparently the only asset in residue.
1 If the client and sister can raise £1500 from their own resources they can lend that to the PRs to pay off the charity to be set off against their entitlement to residue. Or PRs could borrow it and discharge the charity if they can see a way to pay the lender. The charity has to be dealt with in some fashion or ultimately it can force the PRs to realise the estate’s only asset if need be. Given the relatively low value of its share it may be possible for it to be funded by a part surrender of the bond with part repayment of the loan, possibly with a small tax charge on the trustees to be allowed for. (A loan from the insurer would be taxable as a part surrender)
2 Do the other 2 beneficiaries wish to retain the policy long-term? The loan can be vested in them jointly without affecting the bond (as long as it is not contractually non-assignable but this could be changed by agreement between the PRs and the trustees). Whatever the other terms of the loan they can be revised by agreement between the assignees and trustees. The loan can then be left in place as can the bond, repaid at final surrender or piecemeal from partial surrenders, net of tax, hopefully without an overall shortfall.
3 Once the loan has been assigned the two assignees are at liberty to waive it (which the PRs probably have no power to do; although if they did so nonetheless any breach of trust could be authorised in advance but it is messy). A waiver of the full amount would allow the trustees to assign the bond to them without a chargeable event: s484 (1) (a)(ii) ITTOIA 2005 IPTM3400. But the waiver would be 2 chargeable transfers and the trustees’ assignment of the bond would be an IHT chargeable event subject to any available NRB. (Presumably both assignees are eligible beneficiaries). This seems over the top unless retaining the trust is a very big nuisance.
A repayment of the loan by assigning the bond would be an income tax chargeable event because it would be an assignment for money’s worth. (Curiously £1 of money’s worth causes this on the face of it, perhaps another stupidity of the charging structure). If they are prepared to take the income tax hit now this seems the simplest operation; if not retaining the bond in the trust until they are.
Obviously if the charity can be paid off with other assets my remarks on that are overridden. A simple assent in writing will do and the trustees need only be given notice or they are entitled to insist on paying the PRs (in theory). This should then be a legal assignment under s136 LPA 1925 (writing, absolute, notice).