Loans from discretionary trusts

[hiriskpaul]

As far as I can see so far, interest free loans can work the other way. I could make an interest free loan to a trust, repayable on demand, which the trust then invests or passes to beneficiaries.

Be careful with that idea, as it can prove expensive in some circumstances - https://www.gov.uk/hmrc-internal-manual ... l/tsem4400 .

I think you would get away with it where you envisage the trust having no assets / income as all its funds are out on loan, but not in the case where the trust retains and invests the loaned funds.

That's a nasty little trap. HMRC really like to keep income and capital separate don't they? Insurance companies offer Loan Trusts, which I think avoid this trap by investing only in insurance bonds which roll up the income after tax. That avoids income entering the trust and so "loaned" capital can be returned to the settlor. I suppose the other ways round it, apart from lending everything out, are to ensure all income is paid out or only invest in assets that do not produce an income?

[hiriskpaul]

I haven't studied the entire thread.

From the inheritance tax planning book I have been reading it would appear that loans to beneficiaries on any terms, including interest free with no collateral, are ok. ... If anyone has alternative views, experience and links I would be very interested in exploring use of loans.

I'm not an expert but have used IFLRODs in the past on a personal level as against from a trust. Suitably documented and the paperwork was acceptable to our solicitors, as a debt of the Estate, when the time came.

I googled IFLROD, but came up with a blank other than stuff about Ilford Would you mind expanding?

1. One thing I have noticed online (random link to a 2013 discussion which was about a slightly different scenario) https://www.accountingweb.co.uk/any-answers/trusts-loan-to-beneficiary is the suggestion that such use of an interest free loan may not be using the trust funds appropriately. The first reply doesn't provide a source for the extract and I can't immediately tell if the last paragraph is that poster's views or also taken from elsewhere. The second reply adds to the discussion there.

Presumably Ray & McLaughlin’s Practical Inheritance Tax Planning also covers the point, if it is a valid one at all.

2. Another potential pitfall is outlined below (I haven't signed up for the full article nor do I know anything of the website):

SECTION 175 A (1) (a) IHT Act 1984 – discharge of liabilities “out of the estate”
Oct 24 2014
https://www.trusts-estates.co.uk/taxation/section-175-a-1-a-iht-act-1984--discharge-of-liabilities-out-of-the-estate-103911.htm

Extract only:

Where IHT is charged on the estate of a person who died on or after 17 July 2013 ... a new s175A (1) (a) IHT Act 1984 provides that a liability is not to be taken into calculating the IHT liability unless it is “discharged out of the estate”. ...

HMRC's views on this may be found here:

Liabilities: restricted deductions: repayment of liabilities deducted against the estate on death
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm28027 and related links.

Presumably it would be difficult to discharge if the loaned monies are tied up in (an already mortgaged?) property, where by that stage the beneficiary's family may also live.

Interesting links thanks. I am coming to the view that it would be better to insist loans are invested in quickly realisable assets, such as ISAs, rather than property, SIPPs, or just spent!

[hiriskpaul]

IFLROD. Got it, Interest Free Loan, Repayable On Demand