Waiving interest on a loan

Trusts Discussion
1

Hi,

I have a situation where a client had a loan agreement with a deceased person (their sister), who’s estate we are dealing with. There is significant accrued interest due to the client as the loan agreement was made a number of years ago and interest accrued monthly, as well as accruing since the deceased passed away under a separate clause. The deceased died over 2 years ago.

The client is willing to forgive a significant amount of the interest due and this is provided for in the agreement as the parties can agree the interest due under one of the clauses.

My question is does this count as a gift by the client if they waive a large amount of interest (possibly between £10-£20K). My instinct thinks yes but the fact that the agreement specifically allows the parties to agree an interest figure differently to the due interest makes me think maybe not.

Any thoughts would be appreciated as in an ideal world we would rather that the client does not suffer a knock on effect to their NRB from their kindness in this case.

2

If the client is entitled to insist on the full amount of interest then any waiver, even where there is a specific mechanism for it, must surely be a transfer of value.

3

I agree it is very helpful that there is a specific clause which includes a mechanism to agree the interest otherwise due and payable. The actual wording could be crucial. It may not operate to alter retrospectively the taxability of interest which has already accrued due even if that is a contractual possibility.

The only way to to avoid income tax is to waive it before it falls due and payable. If that has occurred it will be too late. SAIM 2400, 2440 and 2450. A deed is essential for this tax and IHT: IHTM19110.

For IHT there are specific provisions about waiving remuneration and dividends:ss14 and15 IHTA. But not interest (or rent). Regardless of these a waiver by deed before any of such four items fall due will be effective for both taxes. The wording of s15 " If the waiver is made within 12 months before any right to the dividend has accrued…, the waiver does not of itself …constitute a transfer of value (IHTM04024)." This is utter nonsense. A waiver made at any time before a dividend falls due is effective.

If income is waived before due S3(3) IHTA does not operate because the effect is not to diminish the estate of the person waiving (it just does not increase it), though it increases the value of another person’s estate, and anyway it is not an omission to exercise a right because no right is yet come into existence.

If the £10-20k of interest has fallen due the waiver will not work for income tax and should have been reported as taxable in the tax year(s) as and when it did. The waiver will fail for IHT as the value of another person’s estate is increased, i.e. that of whoever would otherwise have to pay it. So a possible combined tax rate of 45% + (55 x 40% = 22%) = 67%, though payable by different persons.

Jack Harper

4

Jack

For IHT there are specific provisions about waiving remuneration and dividends:ss14 and15 IHTA. But not interest (or rent). Regardless of these a waiver by deed before any of such four items fall due will be effective for both taxes. The wording of s15 " If the waiver is made within 12 months before any right to the dividend has accrued…, the waiver does not of itself …constitute a transfer of value (IHTM04024)." This is utter nonsense. A waiver made at any time before a dividend falls due is effective.

I agree with your last sentence but, as HMRC is merely referring to the IHT implications, I disagree that IHTM04024 conveys “utter nonsense”. HMRC is only saying that, for IHT purposes, the waiver does not represent a transfer of value if made more than 12 months before the right has accrued and is not suggesting it would be ineffective other than for IHT purposes if made within 12 months. For a change it is not purporting to instruct on the general law (which of course it denies it ever does).

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

5

Paul, it encourages readers to believe that they can only waive a dividend 12 months or earlier prior to the date of payment for interim/ declaration date for payment for final. Why don’t they add in IHTM04220 "But…? At least Capital Taxes is inhabited by specialists and not by the staff of variable quality of other departments.

Jack Harper

6

I’m researching the income tax effect of waiving interest on a loan, and google brought me to this conversation. It says above (per @jack):

The only way to to avoid income tax is to waive it before it falls due and payable. If that has occurred it will be too late. SAIM 2400, 2440 and 2450.

That seems to be saying that the Revenue’s manuals tell us that interest will not be income-taxable if waived before it falls due and payable. But I’ve read all three of SAIM2400, SAIM2440 and SAIM2450 and cannot see that they say this. And doing a “find” on all three pages for “waive” gets no hits.

Is there in fact authority for that proposition in the revenue’s manual? Or somewhere else? I’d be grateful for any thoughts where I should look.

Kind regards, Andrew

7

The first two quoted sections of SAIM deal with when interest arises. The peculiarity of the charge on interest is that it “arises” not at the point at which it becomes due and payable in law (as it does for most other sources of income) but when it is “received”. So waiving it must take place effectively in law before it is received and SAIM2400 and 2440 indicate when interest is received in their view. The examples they give are not exhaustive, I would expect they would say.

2450 indicates that apart from specific legislation interest not yet received will be capital to the assignees if properly assigned. You are concerned with waiver but 2450 indirectly emphasises the tax point for interest in that if the assignor acts before receipt he will not be taxable on it when it is paid to the assignee who will be taxed on it. He cannot claim a deduction against the interest for any price of obtaining the assignment. AIS, if applicable, rectifies that as regards the type of securities it covers: see HS343.

So to extinguish altogether the obligation of a debtor to pay interest the creditor must waive it before it is received and 2400 and 2440 go some way to indicating when HMRC think that may occur. As HMRC do not indicate that the Manual contents are exhaustive of the point, and because they have been known to argue at Tribunal that their Manual views are wrong in law and cannot bind them, I would myself urge a waiver to be made before the interest accrues but strictly it can still be done before receipt provided the lack of receipt can be demonstrated unambiguously. For example, the absence of a right to draw on an account to which it has been credited is unambiguous.

As regards the requisite formalities, HMRC set out their view in IHTM1910 which I accept as correct in law. In context this is about loan principal but I see no difference as regards accrued but unpaid interest on a loan either separately or as part of the entirety.

There is a discussion at https://trustsdiscussionforum.co.uk/t/waiving-statutory-interest-on-legacies/22321 which may be useful and cites the important Parkside Leasing case.

Jack Harper

I’m researching the income tax effect of waiving interest on a loan, and google brought me to this conversation. It says above (per @jack):

The only way to to avoid income tax is to waive it before it falls due and payable. If that has occurred it will be too late. SAIM 2400, 2440 and 2450.

That seems to be saying that the Revenue’s manuals tell us that interest will not be income-taxable if waived before it falls due and payable. But I’ve read all three of SAIM2400, SAIM2440 and SAIM2450 and cannot see that they say this. And doing a “find” on all three pages for “waive” gets no hits.

Is there in fact authority for that proposition in the revenue’s manual? Or somewhere else? I’d be grateful for any thoughts where I should look.

Kind regards, Andrew

–
Previous Replies
Paul, it encourages readers to believe that they can only waive a dividend 12 months or earlier prior to the date of payment for interim/ declaration date for payment for final. Why don’t they add in IHTM04220 "But…? At least Capital Taxes is inhabited by specialists and not by the staff of variable quality of other departments.

Jack Harper

8

@jack that is all very useful. Thank you so much!

Kind regards, Andrew