CheckLists.Tax (beta)
i10. Loan by trust
GENERAL
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- Loan from trust to trustee: query effectiveness
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- There can be a loan to the trustees by one of the trustees in his/her personal capacity (De Vigier)
- Loan from co-trustees to one of the trustees therefore potentially effective.
- Query the position where there is only one trustee.
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INCOME TAX
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Transfer of assets abroad
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- Loan as capital payment
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- Loan may be a benefit (income matching)
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General
- A loan may be a benefit if there are advantageous terms.
- HMRC: "Depending on the precise terms of the loan either situation may give rise to a benefit. Again, depending on the precise terms, the benefit may simply be advantageous terms for repayment of interest on the loan, or in some cases possibly the amount of the loan money received, including any advantage received from the way in which the loan has been applied." (INTM601580).
- But HMRC also say: "A loan made to an individual for full commercial consideration is a ‘benefit’, but such a loan would in practice normally be regarded as a nil benefit, and therefore have no taxable value." (INTM601640).
- This may be dealing with situations where the interest is not paid.
- If interest is left outstanding/waived query whether that is a benefit by way of loan or a different benefit (see INTM601460).
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Value of benefit
- Value is based on interest at the official rate less the amount of interest actually paid by the individual in that year on the loan (s.742C).​
- Only interest paid in the year is deducted (INTM601645).
- It appears that if interest is not paid on time, but is paid in the following year, it can be deducted in the following year (insofar as there is room to do so).
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HMRC manuals: INTM601580; INTM601640;
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Settlements: attribution of trust income to settlor
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- Income accumulated followed by subsequent payment/benefit to child of settlor: deemed payment of income
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- If income is accumulated and a payment is subsequently made to or for the benefit of the settlor's child, the payment is deemed, for the purposes of s.629, to be a payment of income insofar as retained/accumulated income is available.
- Various types of income are disregarded in determining whether retained/accumulated income is available.
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Legislation: ITTOIA s.631;
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- Loan to settlor/spouse is a capital payment triggering s.633 charge
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See i11. Loan to settlor.
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- Loan to third party at settlor's direction/for settlor's benefit treated as capital payment to settlor (settlor has deemed income)
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- 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.
- See i8. Distribution by trust for further notes.
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- Loan by trust to connected company that pays/has paid capital sum (e.g. loan, repayment of loan) to settlor: deemed capital sum by trust to settlor​​
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.
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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.
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Payment in respect of director loan account
- Could be a capital payment by the company.
- HMRC say that unpaid remuneration normally the first source of payments, but not always (CTM61070).
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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. ​
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CAPITAL GAINS TAX
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Matching benefits to gains (s.87)
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- Loan as capital payment for matching
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General
- Any transfer of an asset or benefit can be a capital payment (s.97(2)).
- But there is an exclusion for payments under a transaction entered into at arm's length (s.97(1)).
- "The exclusion for payments under arm’s length transactions is also relevant to the provision of benefits, see CG38640. Trust property occupied by a beneficiary at a commercial rent or a loan on commercial terms would not be a capital payment." (CG38625).
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Amount of capital payment
- Is equal to the value of the benefit conferred by it (s.97(4)).
- Which is taken to be interest at the official rate less any interest actually paid by the person in that tax year on the loan (s.97A).
- If interest is chargeable at a commercial rate but not actually paid, there may, arguably, be no capital payment (due to the arm's length exclusion) even though a value for the benefit would be computed.
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Matching
- See detailed notes at i9. Benefits provided by trust.
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- Loan to company as capital payment
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No exclusion for companies
- Section 87 refers to a beneficiary receiving a capital payment.
- Beneficiary includes anyone receiving a capital payment (s.97(8)).
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Trust makes capital payment to company it 100% owns (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)).
- E.g. beneficial loan to trust subsidiary disregarded.
- See further i9. Benefits provided by trust.
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