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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