My understanding is the Trustee Act 2000 allows trustees much more freedom in investment subject to their duty of care and taking advice, etc. Would an interest-bearing loan to a beneficiary of a NRBT, secured only on a personal undertaking, be treated as an investment? All trustees and beneficiaries are agreed that this loan to a close family member is not detrimental to the interests of the other beneficiaries.
There is an interesting discussion on trustees’ decision making in Folds Farm Trustees Ltd & Anor v Cutts & Ors [2024] EWHC 12 (Ch) (15 January 2024) (bailii.org)
“The framework for the court’s decision is that the Trusts are discretionary. None of the beneficiaries have an entitlement to either income or capital; the decision to benefit a beneficiary is one of the unfettered discretion of the trustees. It is therefore unarguable that each of the children is entitled to an equal division of the assets of the Trusts, or that the trustees could only properly exercise their discretion by treating the beneficiaries equally. It is inherent in a discretionary trust that some beneficiaries may be treated more favourably than others.”
An interest bearing loan is an investment - it yields income but it will not generate capital growth - its value in real terms will fall.
The trustees should evaluate the strength of the personal undertaking but as they seem to have agreed that the loan is not detrimental to the interests of the other beneficiaries they could proceed with it.
Thanks Gerry. That’s very helpful.
The trust will receive the income and could accumulate it, so I think we can set the interest rate so as to compensate the other beneficiaries for the “opportunity cost” for missing out on capital growth.
My worry is mainly that the loan, not being formally secured (say by a charge on a property), would not be regarded as a “proper” investment by HMRC and instead might be treated, at some point, as a distribution of capital. Any thoughts on this?
The trustees will self assess and pay income tax on the interest.
I assume a loan agreement is in place setting out the terms for repayment.
I can’t see HMRC looking behind the terms of that agreement to argue that there has been a distribution of capital.
Thanks Gerry, that gives me some confidence.
Yes a loan agreement has been drafted.
I was envisaging that the interest would be paid into the trust account and declared as income on the trust tax return. It can then be accumulated within the trust (or paid out with a tax credit to a beneficiary). Surely this keeps the trust assets separate from the trustees.
Is this a regulated credit agreement within Article 60B(3) of The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001?
Is the unsecured loan made by way of business carried on by the trustees within Articles 4(1) and 88D? Are they authorised?
Is it exempt under Article 60H(1) as extending credit of more than £60,260m for a purpose other than renovation of a residential property and complying with the specified FCA Rule formalities?
Jack Harper
Hi Jack,
I appreciate you flagging up this question.
There has been a debate as to whether the loan should be secured against the title of a property. I assume this would make it a regulated mortgage contract and would involve legal input on both sides. However the trustees and beneficiary (borrower) are members of the same close family and they are keen to make the arrangement as “informal” as possible, albeit the borrower is offering a personal assurance of their ability to service the loan.
Does this answer your question and help you to advise on my questions?
If the loan is a “one-off” and does not form any part of a trade or business operated by the trust, which would seem to be the case, I don’t believe it is “regulated” even were it to be secured on property.
If the person in firm providing the documentation to support the loan is concerned that this might be a regulated activity, I suggest they should seek appropriate guidance from their Compliance Officer/team.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Thanks Paul - that’s very helpful and confirms my understanding.
Malcolm
I am no expert in this area but I have been through the desultory saga in practice. It often turns on whether the trustees are carrying on business. This issue causes the same problems with the taxability of “trading profits” and whether VAT is engaged. The FCA’s (840 page) PERG is very vague on this:
“2.3.3
Whether or not an activity is carried on by way of business is ultimately a question of judgement that takes account of several factors (none of which is likely to be conclusive). These include the degree of continuity, the existence of a commercial element, the scale of the activity and the proportion which the activity bears to other activities carried on by the same person but which are not regulated. The nature of the particular regulated activity that is carried on will also be relevant to the factual analysis.”
Simples!
I suspect that a reasonably safe harbour is for all the trustees to be lay persons and not to make a regular habit of it
Jack Harper
Thanks Jack - Yes, trustees are lay persons and it’s a “one-off” loan to help a family member. The only reason for charging (minimal) interest is to make it a reasonable investment under the duty of care to the other beneficiaries.