My client is the trustee of a discretionary loan trust. The trust owes money to the estate which needs to be discharged before making appointments of capital /income to the trust beneficiaries. Cashing in the investments would trigger a charge to the higher trust rate of income tax. My client has been advised by his financial adviser that to avoid the higher rate income tax charge he should assign the bonds to the beneficiaries of the estate (who are also the trust beneficiaries) and ask them to vary their interest in the estate in favour of the trusts (i.e. waive their right to receive the loaned money). My questions are firstly would this be considered a variation for consideration and if so are there any CGT consequences that need to be considered.
sharon edelstyn
Phoenix Legal Group
Sharon I think the beneficiaries here would be waiving their rights to the loan in return for a slice of the trust investments so I don’t see that it can qualify as a variation fro IHT and CGT purposes.
So then you have a disposal on transfer by the trustees of the relevant investments so that there would be CGT on that disposal to think about.
Could the trustees appoint the trust fund to the beneficiaries in specie so that they take the benefit of the bonds but also take on the liability to the debt. If the same people as the Will beneficiaries they could then have the right to payment of the debt assigned to them as part of their shares of the estate, thus offsetting liability and payment right.
However then you need to consider the effect of that appointment out of trust - exit charge for IHT? CGT on exit unless holdover can be claimed.
Simon Leney
Cripps LLP
You have probably already considered this, but are there any unused 5%
withdrawal allowances available to the trustees within the bonds (which I
assume are life company single premium bonds) with which to repay the debt
to the estate and then assign-out the [diminished] bonds to the
beneficiaries thereafter?
Paul Storrie
Storrie & Company
You also still have to be very careful about chargeable events. The debt is a liability of the trust and is not charged on the investment bond, so one does not necessarily follow the other. If the beneficiaries accept liability for the debt at the same time as the bond is assigned to them it could be argued that they are giving consideration for the assignment of the bond, which would potentially give rise to a chargeable event gain.
I think one way round it is by a deed of appointment of the trust fund to the beneficiaries outright, but with no reference to the debt, followed by an assignment of the bond, then an appropriation of the debt from the estate to the beneficiaries and a release of the debt by them in favour of the trustees.
The problem arises from the fact that the Will should expressly deal with the debt, and this is usually recommended in the scheme literature, but it is often overlooked. It doesn’t matter if the trust arrangement can continue after the deceased’s death, with the debt being repaid gradually to the beneficiaries of the estate from the 5% withdrawals, but that isn’t always appropriate.
Diana Smart
Gordons LLP