CheckLists.Tax (beta)
i2. Loan to trust
GENERAL
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- Loan from trustee to trust: 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).
- Query the position where there is only one trustee.
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Legislation:
Cases:
HMRC manuals:
Commentary:
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INCOME TAX
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Settlements legislation: attribution of income to settlor
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- Loan to trust on less than commercial terms makes the lender a settlor of those funds
General position
- A loan on commercial terms does not involve an element of bounty, so is not the making of a settlement.
- A loan on non-commercial terms, e.g. low or no interest is regarded as the provision of funds, making the lender a settlor (SP 5/92 §19).
- If a commercial loan is made for a fixed term, but is intentionally left outstanding at the end on uncommercial terms, HMRC regard that as the direct or indirect provision of property, making the lender a settlor (SP 5/92, §20).
- 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)
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Property provided by settlor
- The property provided by the settlor is logically the money loaned.
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Legislation:
Cases: Jenkins v. IRC 26 TC 265 at 279, CoA; IRC v. Wachtel [1970] 3 WLR 857;
HMRC manuals:
Commentary: Chamberlain, §11.13;
See also: SP 5/92;
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- Loan to trust on non-commercial terms may also mean interest is retained
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- Non-commercial loan by settlor to trust 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)
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Legislation:
Cases: Jenkins v. IRC 26 TC 265 at 279, CoA; IRC v. Wachtel [1970] 3 WLR 857;
HMRC manuals:
Commentary: Chamberlain, §11.13;
See also: SP 5/92;
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- ​Money borrowed on security of assets is the proceeds of those assets (must not be capable of benefitting settlor/spouse)
- 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)
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Legislation:
Cases:
West v. Trennery [2005] UKHL 5;
HMRC manuals:
Commentary:
See also:
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- Repayment of loan is capital sum triggering the application of s.633
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- Capital sum includes any sum paid by way of repayment of a loan​ (s.634(1)).
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Legislation: ITTOIA s.634;
Cases:
HMRC manuals:
Commentary:
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Transfer of assets abroad
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- Loan to trust making the lender a transferor
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Loan as a relevant transfer
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Quantum of income arising to person abroad as a result of transfer/associated operations
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Legislation:
Cases:
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Commentary:
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- Loan to trust giving transferor power to enjoy
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- Income arising to the trust does or may operate to increase the value to the transferor of his/her right to repayment of the loan (enjoyment Condition B) (ITA s.723).
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Legislation:
Cases:
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Commentary:
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- Loan to trust giving transferor entitlement to capital sum
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-The capital receipt condition is met if, in the tax year, the individual is entitled to receive any capital sum (ITA s.729(1)).
- Capital sum includes repayment of a loan (s.729(3)).
- Query whether it must be an entitlement to payment in the present tax year.
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Legislation:
Cases:
HMRC manuals:
Commentary:
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- Loan repayment to transferor is receipt of a capital sum triggering capital sum charge
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-The capital receipt condition is met if, in the tax year, the individual receives any capital sum (ITA s.729(1)).
- Capital sum includes repayment of a loan (s.729(3)).
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Legislation:
Cases:
HMRC manuals:
Commentary:
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- Loan from another structure/entity to trust amounting to associated operation
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- The charges operate by reference to income arising to a person abroad as a result of the transfer alone or in conjunction with associated operations.
- If the original recipient of the transferred assets makes a loan to another using the assets (or assets representing/derived from), that is an associated operation (s.719).
- One must then apply the charges by reference to that further recipient (power to enjoy, capital sum, benefit).
- See Matching income of Trust 1 to benefits from Trust 2 in i9. Benefits provided by trust.
- Similar considerations where loan by company to trust.​
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Legislation:
Cases:
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Commentary:
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INHERITANCE TAX
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Gift with reservation
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- Property deriving from loan by the donor is included in the tracing
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- For gifts where the property becomes settled property, trace into the assets of the settlement from time to time (para 5(1)).
- Exclude settlement assets that neither represent nor derive from the property originally comprised in the gift (para 5(1)).
- But include property derived directly or indirectly from a loan by the donor to the trustees (para 5(4)) (irrespective of whether it is interest free or not).
- HMRC seem to accept that the outstanding loan is deducted in calculating the amount attributed to the donor, which would avoid double taxation (IHTM14401 albeit see McCutcheon 7-127).
- Exclude loan from donor's spouse/civil partner (IHTM14401).
Legislation: FA 1986, Sch 20;
Cases:
HMRC manuals: IHTM14401;
Commentary: McCutcheon 7-127;
See also:
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- 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:
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- XX
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