If a loan is made from a discretionary trust to a beneficiary, I believe any income generated is treated as the beneficiary’s for tax purposes. What is the position with regard to any capital generated please?
Redfern Financial Management
A loan by a trust is no different from, say, a bank loan – unless rights are reserved in the facility letter, or other loan agreement, the lender is entitled to the return of the monies plus interest, etc. as set out in the agreement, and does not share the risk/benefit of the borrower’s application of the monies loaned.
If a loan is made to a beneficiary, unless the terms of that loan require: the beneficiary to pay interest; an uplift of the amount required to redeem the loan by reference, say, to the Retail Prices Index; or for the beneficiary to share the benefit from their use of the loan, any “profits” secured by the beneficiary’s application of the loan are theirs and the trust has no claim upon them.
For tax purposes, the profits, etc. generated by the beneficiary’s application of the loan will be taxed on the beneficiary.
" I believe any income generated is treated as the beneficiary’s for tax purposes."
Not quite sure why you would think this?
The beneficiary in receipt of the loan is a debtor of the trust requiring only that the capital of the loan is repaid with or without interest charged thereon. The return to the beneficiary on the application of the monies in whatever form (ie capital growth or income) belongs to the beneficiary and taxable on his/her part.
Are you referring to the position where the settlor may be subject to income tax on trust income following receipt of a loan from the trustees [ITTOIA 2005 s633] as opposed to income generated on the loan proceeds?