I act for the trustees of a discretionary trust created in 2009. The only asset is a loan to one of the beneficiaries secured by a legal charge over the beneficiary’s home. The initial loan was made by reference to the then value of the house expressed as a % and the repayment amount is the same % value of the house at the time of repayment.
It is desired to end the trust, and the trustees (with full agreement of all the discretionary beneficiaries) intend to release the charge on payment only of the original sum loaned and waive any right to the higher repayment figure. The house has risen in value substantially.
My question is how will this arrangement be treated for tax purposes? There is no express right in either the Settlement deed or the Legal Charge deed for the trustees to waive any entitlements.
I should add that IHT is not an issue regardless of any intended waiver
Any advice or thoughts would be gratefully received.
Thank you
I don’t know but I thought I’d write something anyway.
From a tax perspective this releasing part of the amount repayable would seem to save the trust tax. What type of tax it would save would be based on the underlying facts but if the loan was repaid as originally intended I could see the trust being taxed on:
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interest (because interest is actually paid or because of the disguised interest anti-avoidance rules - see s381A ITTOIA +), or
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capital gain (because the trust has a chose in action - see s21(1) TCGA - that it has disposed of rather than an interest in the property).
So just focusing on the CGT aspects (if this were the correct analysis) then the waiver seems to be a disposal of that asset for less than market value and so I would expect the deemed market value rule (s17 TCGA) to apply.
But as I say, I have no idea what the right tax treatment is.
HMRC’s view is that index-linked loan notes generate interest. I am not sure they would draw any distinction between an index and the value of a specific asset.
Views differ but, to the best of my knowledge, nobody has yet taken the point to tribunal.
As interest, it should be capable of being waived without incurring tax on the waived portion.