Good afternoon,
What are the tax benefits to the trust (and to the beneficiary) of a discretionary trust making an interest free loan to the beneficiary that is payable on demand rather than making a capital distribution?
Many thanks,
Patrick
Making a loan payable on demand is a common strategy.
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The trustees have a duty of care so the loan needs to be considered in terms of risk to the trust perhaps at arms lenght on a commercial basis.
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IHTM14317 is rather confusing to me - “while an interest-free loan is not a transfer of value it is a gift because there is a clear intention to confer a benefit”.
According to the guidance its a gift. Ill leave others to comment.
Richard C. Bishop
As noted, this is a fairly common occurrence and for UK tax resident trusts there are no tax consequences, until or unless the loan is waived, when it does become a capital distribution. I have seen this used to minimise administration and compliance costs when regular payments, from say insurance bonds, are made to beneficiaries (say monthly or quarterly) and rather than complete and submit 12 or 4 sets of IHT forms each year, the trustees resolve to loan sums to the beneficiaries during the year and then once a year review the position and resolve to advance the sums loaned by way of a loan waiver/capital distribution - thus requiring only one set of IHT forms.
For non-UK resident trusts however, the benefit of having such interest-free loans are treated as a “deemed” capital payment in the hands of the beneficiary and matched against any relevant income, offshore income gains and lastly stockpiled gains (in order of set-off). The calculation is done in the same way as a P11D interest-free loan.
Maxine Higgins
TC Citroen Wells
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