Settlor is paying mortgage over trust property

I am advising a client who was persuaded to put a rental property into trust in 2015 by Universal Wealth Preservation, settled on herself as the life tenant with remainder on discretionary trusts, with the power for the trustees to advance capital to the life tenant at their discretion.

The property was mortgaged when the settlor put it in the trust. She has been making the monthly mortgage payments throughout, and has remained the registered proprietor at the Land Registry.

If the trustees were now to advance a capital sum to her equal to the amount of mortgage she has paid, could that be treated as a quasi loan repayment to the settlor rather than a straight capital distribution?

The settlor also renovated the property costing £30k and has asked the same question about repayment from the trust.

Thank you for your help on this!

If she is a trustee, could it be a reimbursement of trustee expenditure under her rights in equity. She’d be entitled to it and it avoids the need to imply that the payments were loans.

Not perfect (still looks a little odd to use personal money rather than the cash the trust presumably received in rent) but perhaps cleaner.

Andrew Goodman
Osborne Clarke LLP

On settling the equity was it made clear as to whether the settlor alone would remain responsible for the mortgage repayments or whether the trustees agreed to discharge the repayments (or indemnify the settlor)?

If the former then any capital sums advanced would be capital distributions.

If the latter then the capital sums advanced would effectively constitute loan repayments.

The life tenant is subject to income tax on the rental income qua life tenant and not qua settlor (ITTOIA 2005, s. 624).

If the settlor alone remained liable for the mortgage repayments does each payment constitute an addition of value to the trust for IHT purposes? Certainly it would seem the renovation costs would be such (unless there was an agreement that the trustees would be obligated to repay the settlor for financing the renovation).

GWR; FA 1986 s.102B(3) not applying?

Malcolm Finney.