Waiving IOU interest on NRB trust / HMRC

H dies creating a NRBDT. Trust constituted with IOU by W secured by legal charge against house and house assented to W.

W has now died. The B’s of W’s estate are the same as the remaining B’s of the NRBDT. The B’s want to bring the NRBDT to an end. The B’s are both H&W’s children/trustees/exors.

The IOU had provision for interest based on the RPI, payable only when the demand for payment is made.

The Will gives express power to the Trustees to write off either (or both) any interest in the debt and/or the capital.

The interest (if paid) is approx £50K. The B’s are tax payers and there is no benefit to them in keeping the trust and are minded to write off both the interest and the debt, which when taking into account their fiduciary obligations to the B’s (themselves) appears to be in their best interests.

I know if the debt is not repaid it cannot be claimed as a liability of W’s estate. (S175).

If the interest is waived are there any potential adverse tax repercussions?

There are sufficient other allowances within the estate with W’s NRB, W’s RNRB, H’s TNRB (even after allowing for the debt) and H’s unused NRB (even after deducting the % he used on creating the NRB).

I’m planning to do a trustee resolution to waive the debt per the express Will provisions, remove the legal charge and wrap up the trust. (It is not on the trust register because it is below 80% of the NRB so falls under the exempt regs - and would continue to do so even with interest added.) but I’m concerned I’m missing an obvious elephant in the room with regards to any claw HMRC might use with regards to waiving the interest.

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My recollection when looking into this some years ago was that no income tax liability arose if interest/indexation was waived. At the time I was dealing with a case where the beneficiaries of the trust were different from those of the estate of the surviving spouse who had died and therefore waiving interest was not an option. Although I contended that the indexation was not taxable, which James Kessler advocated, unfortunately HMRC did not agree and we paid the tax. In your case it would certainly be advantageous to waive interest/indexation.

Patrick Moroney
Bwl solicitors

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I do not think there are any adverse consequences to waiving the indexation. As you say, you will not be able to deduct it for IHT (but as this is not needed it isn’t an issue). Just be careful of the timing of the waiver and ensure that you do waive the indexation before the IOU is repaid. If you waive the indexation, no income tax will arise.

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Hi Liz

I have exactly the same situation as you had last year on this point.

Could I ask if you went ahead in the way you anticipated please? I have exactly the same train of thought, provided the Will permits the interest to be waived and the Trustees to resolve to waive before the debt is recalled that should be sufficient ?

Many thanks

Kathy Melkerts

Hi Kathy

Went ahead with this. Recently had c4 and clearance from HMRC on the estate. Haven’t wrapped up the trust yet but only debt recalled was the principal sum and interest was waived. Did trustee minutes, resolution and notice to Exors setting it out. Then transferred the principle sum to the trust. Trust will be wrapped up shortly.

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A satisfactory outcome. Thank you for sharing the results with the members.

Hello

I have this same issue but there is no will that provides for waiving the interest and also the property has been sold and the principle debt on the IOU will be paid to the trustees.

Can anyone see any issues with the interest here?

Do you think the waiver would be considered a disposition by the trust?

Ideally, perhaps necessarily, PRs and/or trustees need specific power to waive. Or it could be breach of trust, unless authorised by all or all significant beneficiaries under s62 TA 1925. As the interest is a prospective asset, less income tax, why would they want to give it away? It might be reasonable to do so if it is not worth the tax compliance cost of returning it. Who would the waiver benefit? The creditor but they may also be a beneficiary in which case the waiver might be entirely proper, but might have to be taken into account if it provides a benefit which diminishes another’s entitlement e.g. reduced share of residue or trust fund. If there is no will then no specific power can be relied on.

As long as the interest has not accrued due it can be waived without tax consequences. If it has accrued due it can be waived but income tax will be due, so only the net amount should be waived. It will also be a disposition for IHT under s3(3) IHTA but by whom?

s91 deals with the admin period by a fiction: that a beneficiary with an IIP (which in my view in context includes an absolute interest) has owned retrospectively from the date of death the property he will ultimately receive when residue is ascertained. This was not changed by FA 2006. So what does IIP mean here? It does not say "qualifying "IIP as in s59.

PRs can make a transfer of value under s3 but not a chargeable transfer under s2. I suspect that HMRC and a judge would recoil from the conclusion that nobody has made one and would take the view that an ultimate absolute beneficiary of residue has made the disposition. But if and so far as the residue is settled per s43 that the eventual trustees make a disposition under s65(1)(b), as the trust commenced on death per s83, which is a chargeable transfer under s2(3). That is clearly the position if the waiver is made by trustees once the AP has ended wrt the trust property which includes the loan.

A waiver must be made by deed if there is no consideration. This is HMRC’s position as regards the debt, the Goose, and it must be sauce for the interest, the Gander, though not mentioned in IHTM19110. If a waiver has been made but not by deed when a deed was required, the attempted waiver is invalid and so it can still be made by deed, tax-free if the interest has still not accrued. HMRC have to accept that this follows logically (though logic is not their strong suit if does not favour them) from their stated position in IHTM19110 (and, anyway, it’s The Law, which even they have to bow to---- eventually). I never count on HMRC applying materiality as to the amount of interest unless they say so in advance or it’s in the statute like £100 in s629(3) ITTOIA , although ex parte Wilkinson [2005] UKHL 30 indicates that pragmatism may be permitted to them (at para 21) though when is not clear.

Jack Harper

Thank you this is helpful. In my scenario, everyone is a relative and beneficiary so we can overcome any issues of consent and approval and the main goal is to limit tax liability to the family as a whole rather than worry about in whose name the benefit ultimately goes.

Would your response be the same if the RPI uplift was not in interest but rather the capital. So an agreement that the IOU catered for payment on demand to be an uplift in the capital payable when payment is being made rather an just interest on the principle sum agreed?

Regards
Sangeeta

Unlike interest index-linked uplift of the capital is not a separate asset so cannot be dealt with separately.It would be otherwise if the machanism for delivering index-linking was not by revalorising the amount of principal repayable but an issue of a new security.

Jack Harper