Two queries re loans made to trustees of discretionary trust

  1. Is there any reason why money cannot be part lent to trustees of a pilot trust and part gifted? E.g. if £500K is settled, can £325K be by way of cash gift and £175K by way of loan made by the Settlor? My understanding is that even if the gross value of the trust is £500K, the net value would still be £325K and not in excess of the LCT limit. For the purposes of this question we assume that the trust deed includes the usual admin provisions including power to borrow.

  2. If following (1) above, is there any reason why the Settlor cannot at some point gift / assign the benefit of the IOU note - so that the debt is owned by another? If so, presumably the assignment or gift of the debt is a PET? Any such transfer would not necessarily be contemplated at time of gift into trust.

Many thanks

G. Harvey

Yes, this can be done.
However, care needs to be taken if the loan is interest-free (or otherwise less than a commercial rate) as sections 633ff ITTOIA* could be in point - payment of a capital sum to a settlor - if the loan is ever repaid.
Also, if the loan is not at a commercial interest rate, you need to make sure it is repayable on demand, otherwise the making of the loan could, itself, constitute a further transfer of value.
The loan could be waived later, once the settlor’s NRB is replenished or via the settlor’s Will. Alternatively, as you may be contemplating, the £325k debt could be assigned to another person (a PET) who could waive the debt (a LCT).

Paul Davidoff
New Quadrant Partners

  • ITTOIA = Income Tax (Trading and Other Income) Act 2005
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Hi Paul, thank you for your response. I should have said that the intention is that the terms of the loan note would be (i) interest free and (ii) repayable on demand. If there is an assignment of the loan note in due course or gift by will, the intention is that the debt would not be forgiven.