CheckLists.Tax (beta)
M1: Making/receiving a loan
GENERAL
Company law
- Loan/quasi loan to director: member authorisation
- A company may not make a loan to a director unless the transaction has been approved by a resolution of the members of the company (CA 2006, s.197).
- Subject to exceptions.
Legislation: CA 2006, s.197;
Cases:
HMRC manuals:
Commentary:
See also:
Meaning of loan
- Misappropriations
- Not loans if taken without proper authorisation (EIM26510).
- "[41] But the transactions may not have been loans. A loan ordinarily involves an advance of money pursuant to an agreement providing for its repayment. There are few if any signs of such an agreement here. If so, the sum claimed is simply the product of a series of defalcations which, on first principles, are recoverable by action." (First Global Media Limited)
- "A charge on the company under s455 does not replace any tax charge under Chapter 7 of Part 3 ITEPA2003 (previously s160 ICTA 1988) and Class 1A NICs charges on the recipient and employer respectively except where the loan account becomes overdrawn because of misappropriations." (NIM12020).
Legislation:
Cases:
First Global Media Limited v. Larkin [2003] EWCA Civ 1765;
HMRC manuals:
Commentary:
See also:
- One loan or multiple loans
- See EIM26109.
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
Meaning of debt
- General
- Distinction between a debt and a claim for damages (Khan v. Singh-Sall [2023] EWCA Civ 1119, §§26 - 28; O’Driscoll v. Manchester Insurance Committee [1915] 3 KB 499).
- Uncertain sum that is capable of being rendered certain can be a debt (Khan v. Singh-Sall [2023] EWCA Civ 1119).
- Contingent right to an unascertainable sum of money not a debt (Marren v. Ingles [1980] STC 500 ).
- employee's liability under facility agreement, according to which the amount and timing of repayment were uncertain was incurring a debt (Aspect Capital Limited v. HMRC [2014] UKUT 81 (TCC), §66).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
Deemed loans
- Employer facilitating a loan
- For meaning of facilitating see EIM26105.
- Employer providing funds for loan is facilitating (e.g. providing funds to EBT) (EIM26110).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Employer providing any form of credit or advance
- Credit is the deferral of payment of a sum which, absent agreement, would be immediately payable (Grant v. Watton [1999] STC 330).
- Defaulting on a payment obligation without asking for time to pay is not obtaining credit and merely allowing a default to occur is not giving credit (R v. Miller [1977] 1 WLR 1129).
- Structured settlement is not credit (CFL Finance Limited v. Bass [2019] EWHC 1839 (Ch)).
- Not every postponement of a payment is credit (Dimond v. Lovell [2002] 1 AC 384 at 405).
- Advance means early payment of an amount that will or may become due to the recipient in the future (Aspect Capital Limited v. HMRC [2014] UKUT 81 (TCC), §61, Warren J and Judge Sinfield).
Legislation: ITEPA s.173(2)(a);
Cases: Grant v. Watton [1999] STC 330; Nejad v. City Index [1999] EWCA Civ 1812, §57; R v. Miller [1977] 1 WLR 1129; CFL Finance Limited v. Bass [2019] EWHC 1839 (Ch); Williams v. Range [2004] EWCA Civ 294; Dimond v. Lovell [2002] 1 AC 384
HMRC manuals: EIM26108;
Commentary:
See also:
- Alternative finance arrangements
- Employment income - treated similarly (EIM26515).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Close companies acquire control of a company that has made a loan or advance
- Company that made loan deemed to have made it immediately after control acquired by the close company (CTA 2010, s.460).
- If control is acquired by two or more close companies, the loan is deemed to be made by each of those close companies and apportioned between them (CTA 2010, s.460).
- Query whether the above applies if the company that made the loan was not, at that time, controlled by another company (s.460(1)).
- Exclusion where no connection between the making of the loan and the acquisition of control and/or the funding to the company that made the loan (CTA 2010, s.461).
- The intention is to limit this deeming to cases in which "a loan by the controlled company is clearly related to an application of the controlling company's own funds" (CTM61740).
- Consequential adjustments to operation of legislation in CTA 2010, s.462.
Legislation: CTA 2010, s.460 - 462;
Cases:
HMRC manuals: CTM61720; CTM61730; CTM61740.
Commentary:
See also:
- Arrangement under which close company makes loan not to participator and another person makes a payment etc. to participator
CTA 2010, s.459
- Limited exceptions in s.459(3).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
INCOME TAX
Trading
- Deduction for the incidental costs of seeking/obtaining finance where interest on finance is deductible
General rule
- Deduction allowed in calculating profits of trade for the incidental costs of obtaining finance by means of a loan/loan stock if the interest on the loan is deductible (ITTOIA s.58).
Exclusion for convertible loan stock
- No deduction under s.58 where the loan/loan stock carries a right to conversion exercisable within 3 years of obtaining the loan (s.59).
- But if, in the event, the conversion does not happen within 3 years, incidental costs in those 3 years are deductible at the end of 3 years (s.59(3)).
- Conversion partly exercised - proportion of costs allowed.
Incidental costs
- Means expenses which are (s.58(2)):
(1) Incurred on fees, commissions, advertising, printing and other incidental matters; and
(2) Incurred wholly and exclusively for the purposes of obtaining the finance, providing security for it or repaying it.
- Key person insurance policy:
- Costs of taking out the policy are incidental costs.
- Premiums on the policy are not (BIM45525).
Abortive costs
- Expenses incurred wholly and exclusively for the purpose of obtaining finance/providing security are incidental even if it is not obtained (s.58(3)).
Legislation: ITTOIA s.58;
Cases:
HMRC manuals: BIM45525;
Commentary:
See also:
Close companies
- Benefit to shareholder/participator
- Query whether any expense is incurred
Legislation: CTA 2010, s.1064
Cases:
HMRC manuals:
Commentary:
See also:
Settlements code (attribution of income to settlor)
- Loan to/guaranteeing loan to company owned by children as a settlement
- Butler v. Wildin: T's children acquired shares for a 'trifling sum' in a company set up to carry out a development project. T made loans to the company and guaranteed bank loans. Held that this arrangement was a settlement.
- "The risk that the development would not prove profitable and might result in loss was taken by the taxpayers."
- "the arrangement made by the taxpayers was clearly a reciprocal arrangement under which each contributed, whether by the provision of skill and services or by making temporary loans, to the common purpose of providing the shareholders of the company and so indirectly and to the extent of their shareholding the four older children with an income-producing asset free of risk and cost."
- Shares transferred later by an uncle were disregarded as not being part of the arrangement.
- Shares transferred later by father were their own settlement.
Legislation:
Cases:
Butler v. Wildin [1989] STC 22;
HMRC manuals:
Commentary:
See also:
- Loan to trust on less than commercial terms makes the lender a settlor of those funds
- A loan to a trust on non-commercial terms is regarded as the provision of funds to the settlement (SP 5/92, §22).
- In Wachtel, the settlor guaranteed a loan to the trust and placed money in a deposit account with the lending back. The settlor was held to have settled the whole sum (including the borrowed sum) and retained an interest (because the trust payments of income to the bank released the settlor's deposit pro tanto).
- May also mean an interest is retained.
- "The question, therefore, is whether on the facts of this case the settlor can be said, during the year 1937–1938, to have had an interest in income arising under the settlement in the extended meaning of that phrase which is found in sub-s (4). The position when the trustees received the income of that year was this: As I have pointed out, they could have applied it in any one of the three ways which I have mentioned so far as the language of the settlement is concerned. The one that they chose was the third, namely, the payment off of the loan, or part of it. At the moment before they had come to the decision to apply the money in that way, it was, I think, true to say that if they so determined, the money would thereupon have become applicable for the benefit of the settlor. It is not disputed that the repayment of a non-interest bearing loan was for the benefit of the settlor within the meaning of this subsection. It is, therefore, not necessary to consider what the position would be if the loan had been of a different description. My words must not be taken as expressing any view on that point." (Jenkins)
Legislation:
Cases: Jenkins v. IRC 26 TC 265 at 279, CoA; IRC v. Wachtel [1970] 3 WLR 857;
HMRC manuals:
Commentary:
See also: SP 5/92;
- Money borrowed on security of assets is the proceeds of those assets (must not be capable of benefitting settlor/spouse)
- If related property is or can be paid to/applied for the benefit of the settlor/spouse, the settlor has an interest.
- Related property includes property representing the proceeds of the property.
- Where:
(1) Trust 1 borrows money on the security of assets provided by the settlor;
(2) Trust 1 transfers the borrowed money to Trust 2.
(3) The settlor is excluded from Trust 1 but not Trust 2.
Then:
(1) The borrowed money is the 'proceeds' of the assets provided by the settlor
(2) And remains the proceeds even when transferred to Trust 2.
- "[17] ... The difficulty with this argument is that it does not deal with the relevant question: whether in relation to the proceeds of the mortgage of the Einkorn shares the moneys comprised in the second settlement constituted derived property. They plainly did when they were received by the trustees of the first settlement; they did not change their character when they were transferred to the trustees of the second settlement; and the settlor continued to enjoy the income from them during the relevant year. The fact that the settlor obtained his right to income under the trusts of the second settlement is immaterial if the income represented the income of the proceeds of property comprised in the first settlement." (West v. Trennery HoL)
Legislation:
Cases:
West v. Trennery [2005] UKHL 5;
HMRC manuals:
Commentary:
See also:
- Loan to settlor/spouse is capital payment to settlor triggering the s.633 charge
- Capital sum includes payment by way of loan.
- Reference to settlor includes spouse/civil partner (s.634(7)).
- Can include payments to third parties at the settlor's direction or for his/her benefit (ITTOIA s.634(5)).
- Exclusion for certain temporary loans (ITTOIA s.642; CTM61090).
- Further notes:
Legislation: ITTOIA s.634;
Cases:
HMRC manuals: CTM61080;
Commentary:
See also:
- Loan to third party at settlor's direction/for settlor's benefit treated as capital payment to settlor (settlor has deemed income)
- A loan is a capital payment for the purposes of ITTOIA s.633.
- A capital payment paid by the trustees to a third party at the settlor's direction etc. is treated as paid to the settlor (s.634(5)).
- Accordingly a loan to a third party by the trustees at the direction of the settlor is treated as a capital payment to the settlor.
- Further notes:
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Loan to settlor by company connected with trust: deemed capital sum by trust to settlor if company has received associated payments
Background
- Where the settlor/spouse of a trust receives a capital payment from the trust, income of the trust can be matched to that capital sum and taxed on the settlor (ITTOIA s.633).
- Capital sum means: (i) loan; (ii) repayment of a loan; (ii) any sum paid other than as income and not for full consideration.
- See i8. Distributions to beneficiaries for further notes.
Capital sums by connected company deemed to be made by trustees
- Where:
(1) A capital sum (including loan, repayment of loan) is paid to the settlor by a body corporate connected with the settlement; and
(2) The trustees make an associated payment (directly or indirectly) to the body corporate,
Then: the capital sum is treated as paid by the trustees to the settlor for the purposes of s.633 (ITTOIA s.641).
- Connected body corporate - see s.637(8).
- Reference to settlor includes spouse (s.643(1)).
- For meaning of associated payments and quantum of capital sum etc. see i8. Distributions to beneficiaries.
Associated body corporate
- A payment by/to a body corporate which is associated with another body corporate may be treated as paid by/made to that other (s.643(4)).
- Associated - see CTA 2010 s.449.
Exclusion for certain loans to settlor
- Loan to settlor by a body corporate is not caught where (s.642):
(1) The whole loan is repaid within 12 months.
(2) No loans by any connected body corporate have been outstanding for more than 1 year "in any period of 5 years".
(3) No loans made by the settlor to any connected body corporate have been outstanding for more than 1 year "in any period of 5 years".
Legislation:
Cases:
HMRC manuals: CTM61070;
Commentary:
See also:
Transfer of assets abroad
- Loan between entities: matching benefits from one entity with income arising in another entity.
- A loan between entities (e.g. trusts, companies etc) may provide grounds for matching benefits provided by the borrower with income that has arisen or does arise in the lender.
- See Company related: G5. Other benefits.
- See Trust related: i9. Benefits provided.
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Benefit of loan/debt arising from transfer of assets treated as representing the assets transferred
Effect in relation to the transfer of assets
- If T transfers assets to (for example) a company in return for an obligation (of the company) to pay money, the benefit of that obligation is treated as representing the assets transferred (ITA s.717(b)(ii)).
- Accordingly transactions in relation to the creditor rights can be associated operations (s.719).
- That may be relevant for a variety of reasons, including motive defence.
Legislation: ITA 2007, s.717;
Cases:
HMRC manuals:
Commentary:
See also:
- Benefit of loan/debt owed by person to whom assets have previously been transferred treated as representing those assets
- The literal wording of s.717 does not require any connection between the transfer of assets to the person abroad and the loan.
- Thus, if there is a transfer of assets and an entirely unrelated loan (which may also be a transfer of assets), the debt obligation represents the original assets transferred.
- This gives a bizarre mismatch between the money lent (not related to the original assets, see below) and the debt arising from that loan (treated as representing the original assets).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Use of loan taken out by company not of itself an associated operation in relation to the shares in that company (resulting income not within TOAA)
- In Rialas:
- T contributed £10 to Cyprus trust.
- Trustees used the £10 to acquire BVI Co.
- BVI Co borrowed $15m (T facilitated this loan).
- BVI Co used the $15m to purchase the shares of a co-owner in a company T also held shares in.
- BVI Co received dividends on the shares acquired.
Held:
- The establishment of the trust + acquisition of shares in BVI Co did not enable BVI Co to receive the dividend.
- "Put another way, the establishment of the Rialco Trust, and the acquisition of the subscriber shares in Farkland, did not themselves enable Farkland to receive dividends on the Argo shares. The receipt of such dividends could only be guaranteed once Mr Cressman had, additionally, agreed to sell those shares and Farkland had funds to pay the purchase price due." (§52).
- Borrowing the money and acquiring the co-owner shares were not an associated operation with T's transfer of £10 because they were not "in relation" to the £10 transferred:
- "Perhaps with an eye on that objection, [HMRC] sought, in passages in her submission, to expand the scope of the relevant “associated operations” to include Farkland’s borrowing of $15.3m from Magnetic and its acquisition of the Argo shares themselves. However, the FTT was correct to note, at [70], that these transactions could not be relevant in the context of HMRC’s second argument since they were not operations “in relation to”, the transfer of the C£10 as required by s742(1)." (§53)
Legislation: ITA 2007, s.717;
Cases:
Rialas v. HMRC [2020] UKUT 367 (TCC), Meade J and Judge Jonathan Richards;
HMRC manuals:
Commentary:
See also:
Transactions in securities
- Loans as securities/transactions in securities
- In Williams the loans were transaction in securities because a condition of the loan was that the borrower had to deposit Government stock as security for the loans - the loan related to the government stock deposited (CoA at 302; see HoL at 309).
- “[29] The word "securities" includes not only stocks and shares of every description, including preference shares, but also debentures and unsecured loan notes. It would not be a normal use of language to describe the payment of a fixed dividend in respect of preference shares as a transaction relating to securities; and I would at least pause before attaching such a description to the payment of interest on a debt merely because it was secured by a debenture or unsecured loan note.” (Laird)
- “The meaning of transactions in securities has been clarified by case law as including the following: … Loans made by a company to individuals who subsequently acquired the company.” (CTM36810)
- Query the relevance of the meaning of debt on a security for CGT purposes (CG53425 - debt needs to be capable of being held as an investment + realised at a profit).
- If loan is a transaction in securities, repayment is a further transaction in securities - “The redemption of the debentures was, in my opinion, a transaction relating to them and so a "transaction in securities" as defined by the section. I think that the issue of the debentures on May 18, 1953, was also a "transaction in securities" within the meaning of the section.” (Parker at 161 - gap between original transaction and receipt of cash was 7 years)
Legislation:
Cases:
IRC v. Parker [1966] AC 141;
IRC v. Laird Group Plc [2003] UKHL 54;
HMRC manuals: CTM36810; CG53425;
Commentary: Kessler, Ch 55;
See also:
REMITTANCE BASIS ISSUES
- Whether money received by relevant person under loan derives from the source (for the lender) of the loaned monies
- A remittance can arise where property is brought to the UK (by or for the benefit of a relevant person) and that property derives from the income or gains (s.809L(3)(b)).
- Query whether money received under a loan derives from the source of the loaned monies for the lender (e.g. remittance basis income).
- If so, the borrower bringing the money lent to the UK could give rise to a remittance for the lender (if the borrower is a relevant person).
- (or it could be a taxable remittance for the borrower himself/herself, e.g. if the money has been lent by a company to whose income TOAA applies).
- Alternatively, the money received under the loan might derive only from the consideration given by the borrower (i.e. the promise/obligation to repay).
- There are specific rules that deal with debts by reference to the funds used to repay the debt (the relevant debt rules).
Views
- Kessler suggests that there are strong arguments the loaned money derives only from the promise to repay, at least where the loan does not have characteristics of an outright payment (Chapter 17).
- HMRC seem to take the view that the loaned money retains its original source. They give the following example of a remittance: "you loan some of your foreign income to a company you control overseas or settle some foreign income in an offshore trust. The company or trustees bring the money to the UK" (RDRM33050).
- Clarke seems to agree with HMRC (§33.14).
Comparison with related situations
- X sells an asset to Y, Y pays using Y's remittance basis income:
- The sale price money received by X from Y does not derive from whatever source that money had for Y (e.g. remittance basis income).
- For X, the money received derives from the asset that X sold.
- X buys an asset using X's remittance basis income, X sells that asset to Y:
- In Y's hands the asset does not derive from X's remittance basis income.
- For Y, the asset derives from the money Y used to buy it (which may be clean capital).
- The same result should logically apply if X leaves the consideration outstanding (the asset in Y's hand derives from the promise to pay).
- Query why it should be different if Y effectively "buys" a debt obligation from X (by Y lending money to X).
Potential for multiple taxation
- If the money received under a loan does derive from the source of the money for the lender (e.g. lender's remittance basis income), there is the potential for the same "bringing" etc. of money to the UK to give rise to multiple taxation.
- Y lends money (deriving from Y's remittance basis income) to X (a relevant person for Y).
- X repays the loan with X's own remittance basis income.
- X buys an assets with the loaned money and brings it to the UK.
- If the loaned money derives from Y's remittance basis income, both Y's remittance basis income and X's remittance basis income seem to be remitted (see s.809P(3), (5), (12)).
- The multiple charges could be on the same person (e.g. where Y is a company on whose income X is taxable under TOAA).
Legislation: ITA 2007, s.809L; s.809P;
Cases:
HMRC manuals:
RDRM33050 - Remittance Basis: Practical Examples of Remittances to the UK;
Commentary: Kessler, Chapter 17; Clarke, §33;
See also:
Query whether benefit of cheap employment-related loan can be remitted
XX
Legislation: ITA 2007, s.809VH
Cases:
HMRC manuals:
Commentary:
See also:
Reversal of business investment relief from remittance
Cheap loan may breach extraction of value rule
XX
Legislation: ITA 2007, s.809VH
Cases:
HMRC manuals:
Commentary:
See also:
CORPORATION TAX
Close company makes loan/gives credit to shareholder/participator
- Company required to pay corporation tax
XX
Legislation: CTA 2010, s.455;
Cases:
HMRC manuals:
Commentary:
See also:
- Loan/credit to associate of a participator
XX
Legislation: CTA 2010, s.455;
Cases:
HMRC manuals:
Commentary:
See also:
- Non-UK resident company is not a close company
- No charge if the company is not UK resident when the loan is made, even if it later becomes UK resident.
- But charge applies where non-close company is controlled by a close company (CTA 2010, s.460).
- Exception where no connection between making loan and acquisition of control or between the loan and provision of funds by the close company (CTA 2010, s.461).
Legislation: CTA 2010, s.455, s.460;
Cases:
HMRC manuals: CTM61710;
Commentary:
See also:
Loan by close company to holding company to allow it to pay off purchase consideration loan notes
- Potential deemed loan by close company to participator
- "Consideration should be given to whether Section 459 could be applied to loans to partnerships that are not otherwise chargeable (see CTM61520) and, similarly, to loans to employee share schemes/employee benefit trusts etc where Section 455 (1) does not apply (see CTM61525).
It should also be considered in management buy-out situations. In many cases the close company makes a loan to the new owners who then use those funds to pay the outgoing shareholders for their shares. Whilst this can be a difficult area in which the facts are absolutely crucial, it is exactly the type of arrangement which should be chargeable under Section 455. The company’s own money is being used to buy out the existing shareholders." (CTM61550)
- No charge if money transferred intra-group by way of dividend instead.
Legislation: CTA 2010, s.459;
Cases:
HMRC manuals: CTM61550;
Commentary: Kessler: Loans From Companies
See also:
CAPITAL GAINS TAX
Matching non-resident settlement gains to benefits
- Loan as a capital payment/benefit
General
- A loan may be a capital payment/benefit for the purposes of the CGT rules matching non-resident settlement gains to benefits (s.97).
- Value is based on official rate of interest less interest actually paid in the tax year.
- Note that:
- Settlement is not limited to trust and has its broad ITTOIA s.620 meaning. An outright gift can be a settlement.
- UK resident companies receiving capital payments can be taxable.
- There are rules to deem payments made to companies to be made to participators and payments by companies as made by trustees.
- See:
- G5. Other benefits from company
- i9. Benefits provided by trust
Capital payment within group 100% owned by trust (generally ignore)
- HMRC say: "In general, transactions between trustees and companies which they, directly or indirectly, wholly own, or between such companies, are outside the scope of TCGA 1992 Sch 5 para 9(3) and are not treated as capital payments within TCGA 1992 s 97." (SP5/92, §18)).
Loan to close family member attributed to UK resident settlor
- Note the rule attributing a capital payment/benefit provided to a close family member of the settlor, to the settlor (s.87G).
- Applies where settlor is UK resident.
- See i9. Benefit provided by trust.
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Capital payment/benefit recipient making loan to UK resident: deemed capital payment receipt by UK resident
- The onward gift rule applies (see i9. Benefits provided by trust) where (inter alia) the original recipient provides a benefit to the subsequent recipient that includes (all or part) of the original benefit or anything that derives from the original benefit.
- The effect of the onward gift rule is that the onward gift is treated as a capital payment received by the onward gift recipient
- If the original recipient receives money (or, perhaps, converts an asset received into money) and lends it to another on favourable terms, part of the benefit has been passed on. (subject to application of the other conditions).
- The same may apply where a debt on favourable terms is owed by a UK resident to trustees who assign the benefit of the debt to a non-UK resident beneficiary, at least where the debt could be called in but is not.
Legislation: TCGA s.87HA.
Cases:
HMRC manuals:
Commentary:
See also:
INHERITANCE TAX
Transfer of value/gift
- Cheap loan as a transfer of value if not repayable on demand
Repayable on demand
- Interest free loan repayable on demand is not a transfer of value because the right to repayment is equal to the amount transferred (IHTM14317).
Fixed term
- If a loan is made for a fixed term at below a commercial rate, there is a transfer of value.
- The transfer is equal to the difference between the sum lent and the value of the right to repayment (which will be discounted to take into account the delay in repayment).
- If the loan is at a market rate, either there is no loss to the estate or the commercial transactions exclusion should apply (IHTA s.10).
Legislation:
Cases:
HMRC manuals: IHTM14317 - Lifetime transfers: gifts with reservation (GWRs): the gift: interest free loans;
Commentary:
See also:
- Cheap loan by closely held company: transfer of value attributed to participators
- If a closely held company makes an interest free/cheap loan giving rise to a transfer of value, that transfer of value can be apportioned to participators under s.94.
- See further C4. Gifts by companies.
Legislation: IHTA 1984 s.94;
Cases:
HMRC manuals:
Commentary: McCutcheon §2.78;
See also:
Business property relief
- Loans/DLA as excepted assets
- Commercial loan may not be an excepted asset.
- Interest free DLA will be an excepted asset.
Legislation: IHTA s.112;
Cases:
HMRC manuals:
Commentary:
See also:
Gift with reservation of benefit
- Receiving a loan from gifted money as a gift with a reservation of benefit
- Loan of gifted money or an equivalent amount is a reservation of benefit (IHTM14336).
- Applies even if commercial rate of interest is paid.
- Same applies if money borrowed is income from money gifted to settlement (Permanent Trustee Co).
- Note that the tracing rules do not apply to absolute cash gifts, not becoming settled property (IHTM14372).
Legislation:
Cases: Commissioner of Stamp Duties of New South Wales v. Permanent Trustee Co [1956] AC 512;
HMRC manuals: IHTM14336;
Commentary:
See also:
- Whether cheap loans give rise to gift with reservation
- HMRC say that there is a gift "the property disposed of is the interest foregone", but no reservation of benefit.
Legislation:
Cases:
HMRC manuals: IHTM14317 - Lifetime transfers: gifts with reservation (GWRs): the gift: interest free loans;
Commentary: McCutcheon 7-53;
See also:
- Whether donee of debt not calling in debt gives to to a reservation of benefit
- HMRC's view in relation to double trust arrangements is that not calling in the loan is a reservation of benefit in the gift of the loan because if the loan was called in, the debtor trust would be forced to sell the property and the beneficiary of the debtor trust would not be able to occupy it (IHTM44104).
- HMRC's view that there is a reservation of benefit where the terms of the loan prevent it being called in before a certain date has been rejected (IHTM44105; Pride, §100; Elborne).
Legislation:
Cases:
Pride v. HMRC [2023] UKFTT 316 (TC);
Elborne v. HMRC [2025] UKUT 59 (TCC);
HMRC manuals: IHTM44104; IHTM44105;
Commentary:
See also:
- Property derived from loans to settlements
- Property derived from loans to settlements in which the settlor retains an interest is/can be property subject to a reservation (IHTM14401).
Legislation:
Cases:
HMRC manuals: IHTM14401
Commentary: McCutcheon 7-53;
See also:
- Loan to trust from which lender excluded not a gift with reservation
- HMRC accept that a loan to a trust settled by the lender but from which the lender is excluded, does not give rise to a reservation of benefit in the settlement, even if repayable on demand (IHTM44113).
Legislation:
Cases:
HMRC manuals: IHTM44113;
Commentary:
See also:
Limits on deductability for IHT purposes
- Consideration given by creditor for debt derives from the deceased
- Debt incurred by deceased disallowed if the value of any consideration given by the creditor for the debt consisted of (FA 1986, s.103):
- property derived from the deceased; or
- consideration given by any person who was entitled to or had property derived from the deceased.
- Deemed ownership under IHTA s.49 does not involve deeming beneficiary to incur liabilities of trustees (even though those are taken into account when calculating value) (Elborne UT, §59).
- Limb 1 requires two transactions: (1) transaction by deceased which provides what becomes the consideration for the debt; (2) use of that consideration to give rise to liability for deceased (Elborne UT, §63 - this would have been relevant, on the facts, if the debt incurred by the trustees had been deemed to be incurred by the IIP-beneficiary).
Legislation: FA 1986, s.103;
Cases:
McDougal's Trustees v. The Lord Advocate [1952] SC 260;
Elborne v. HMRC [2025] UKUT 59 (TCC);
HMRC manuals:
Commentary:
See also: