BIG GROUP

[webberg]

The debate here is fascinating but I would make a couple of observations and a suggestion.

The "expert" (caveats accepted) is operating without full knowledge of the trusts, the schemes and the various actions and inactions of the past 15 years. Not his/her fault and I for one appreciate the insight and analysis.

Those requesting the information and data are inexpert and I suspect fishing to degree based on inadequate documents, information and understanding of the schemes.

I fear therefore that a coming together of minds at an agreed analysis may be difficult.

I have also observed before that HMRC is sticking obstinately to an analysis that does not accord with the facts. I do think however that they will view the exchange with interest, cherry pick the parts they want and ignore the parts they don't. However we should be wary of making a gift to HMRC at this point.

I suggest that this debate is best carried on via PM or email. You don't need me to broker this although I'd be happy to be an honest broker and share around email addresses. I am happy to be part of the debate or not, as you choose.

[Iliketax]

The loan charge has ignored currency depreciation of loans. Does IHT do the same? Should we use depreciated values or principal amounts when working out IHT?

With caveats about this not being my area... The amount subject to IHT for a s86 trust is based on the step change in the value of the trusts assets as a result of the event. Values here are based on what a random stranger would pay for the asset.

So if the trust had £100,000 of cash and then gave a loan to a borrower who pays a market rate of interest (based on the length of the loan, the credit worthiness of the borrower etc rather than some random HMRC or nominal rate), then the loan receivable is probably worth £100,000. And so tax would not be due as £100,000 less £100,000 is nothing.

If the loan were given to a very credit worthy person, interest-free and repayable in ten years, the loan receivable may be worth £10,000 to a random stranger (e.g. the BT pension fund). So making the loan would reduce the value of the trust's assets by £90,000. That would then be subject to IHT when the loan is made.

I have no idea what your loan receivable might be worth to a random stranger. Probably not a lot. But who knows. If that is right, the IHT is due on (in my example) £100,000 less £1 (or whatever) when it is made.

The rate of IHT is given by s70(6) IHTA 1984 and depends on how long the assets have been in the trust. Less than three months and it is 0% (hence an earlier comment of mine). For the next ten years is 0.25% for every three months (after that a further 0.2% for every three months).

[starstruck]

The loan charge has ignored currency depreciation of loans. Does IHT do the same? Should we use depreciated values or principal amounts when working out IHT?

[Iliketax]

No doubt I don't have the whole picture here. It isn't easy to grasp.

I don't have the whole picture either. It's not what I do for a living. From my perspective though there is the 'normal' regime for discretionary trusts (so ten year charges and exit charges) which you are referring to and then some special rules for certain kinds of discretionary trusts (e.g. EBTs). It is the latter I was referring too.

[eek]

If the loans are below £325k and therefore no IHT is due. Is the amount you can leave you children on your death reduced by the loan amount? If so, they (your estate) will end up paying 40% of the loan when you die and that means with a combination of PAYE, NI and IHT; HMRC get pretty much the whole loan in tax .... please tell me I'm wrong.

Sadly I suspect that’s right - Hmrc will go for every bite of the cherry they can get.

Just be glad you didn’t touch a pension based scheme

[starstruck]

Iliketax, the rules around IHT on Trusts are bewildering but referring back to my post at
http://forums.contractoruk.com/hmrc-...ml#post2498516
and also reading at
https://www.gov.uk/guidance/trusts-and-inheritance-tax (last updated Aug 2017)

It seems that the threshold of £325k should apply.

Citing the second link above:
Work out if Inheritance Tax is due
For most types of trust Inheritance Tax is due when you make transfers that total more than the Inheritance Tax threshold of £325,000. You work this out by adding up the value of any transfers (based on the loss in value to the settlor’s estate) and any chargeable gifts made in the previous 7 years by the settlor. Inheritance Tax is due on everything above the threshold

No doubt I don't have the whole picture here. It isn't easy to grasp.

If the loans are below £325k and therefore no IHT is due. Is the amount you can leave your children on your death reduced by the loan amount? If so, they (your estate) will end up paying 40% of the loan when you die and that means with a combination of PAYE, NI (loan charge) and IHT; HMRC get pretty much the whole loan in tax .... please tell me I'm wrong.

[ChimpMaster]

Iliketax, the rules around IHT on Trusts are bewildering but referring back to my post at
http://forums.contractoruk.com/hmrc-...ml#post2498516
and also reading at
https://www.gov.uk/guidance/trusts-and-inheritance-tax (last updated Aug 2017)

It seems that the threshold of £325k should apply.

Citing the second link above:
Work out if Inheritance Tax is due
For most types of trust Inheritance Tax is due when you make transfers that total more than the Inheritance Tax threshold of £325,000. You work this out by adding up the value of any transfers (based on the loss in value to the settlor’s estate) and any chargeable gifts made in the previous 7 years by the settlor. Inheritance Tax is due on everything above the threshold

No doubt I don't have the whole picture here. It isn't easy to grasp.

[Iliketax]

If you have a method which would take care of the loans and/or avoid IHT bill then I would be extremely interested.

I'm guessing on this as I don't do IHT for a living. But assuming it is a s86 trust (e.g. a normal employee benefit trust) that has made the loan then the IHT is triggered as follows:

(2) Subject to subsections (3A), (4) , (4A) and (5) below, there shall be a charge to tax under this section—

(a) where settled property ceases to be property to which this section applies, otherwise than by virtue of a payment out of the settled property, and
(b) where a payment is made out of settled property to which this section applies for the benefit of a person within subsection (3) below, or a person connected with such a person, and
(c) in a case which paragraphs (a) and (b) above do not apply, where the trustees make a disposition (otherwise than by way of a payment out of the settled property) as a result of which the value of settled property to which this section applies is less than it would be but for the disposition.

The waiving of the loan would not be a "payment". The loan receivable would cease to be "settled property" as it no longer exists. So if the loan receivable had value when it was waived there would be an IHT charge. But if the loan is repaid (with money) and the trust then pays the same money out (i.e. it makes a "payment"), there would be no event within s72(2)(a). The payment out would be fully taxable but the loan would have disappeared with no IHT. There would be no April 2019 loan charge (since it has been repaid with money) and you will pay income tax (and NIC if the employer is still around) on the money you receive from the trust at today's tax rates. But (off the top of my head)...

1. You need to make sure that you are not within the scope of s72(3). That's something you would need to take professional advice on. You will be if you "directly or indirectly provided any of the settled property otherwise than by additions not exceeding in value £1,000 in any one year". Get your professional adviser to google the Hayley Mills case. You may well be stuffed on that.

2. The loan receivable may have no or negligible value now as it lost it when the loan was made. If so, it is too late to do anything about the IHT charge.

3. The trust might not be a s86 trust. Your professional adviser won't know this without looking at the trust deed.

4. You have to really (and I mean really) repay the loan with "money". If you don't, the April 2019 loan charge is still there and you have to rely on the double tax relief rules. Those sections are not easy for your professional adviser to get to grips with.

5. The trustee needs to be involved and they may well charge you for the fun of it.

6. It does sound like it could fall within DOTAS (e.g. employment income tax hallmark, standardised product hallmark). Your professional adviser may or may not be comfortable with that. If they are not completely comfortable, don't touch it with a very long pole.

7. You should ask your tax adviser to think about things from a realistic view point. In other words, when viewed realistically, is it effectively a loan waiver and so creates an IHT charge. If you know with certainty that you'll get your money back when you repay your loan then you might well be stuffed. If you don't know, why on earth are you bothering to repay the loan?

8. If you have to borrow from a bank to repay the loan as you don't have the cash, make sure that you borrow off your own bat. If you get a loan that has been arranged for you by the promoter then it may well create a new disguised remuneration tax charge. This will be the case if any of the following applies (i) the lender doesn't actually lend to the public at large in the normal course of its business, (ii) your getting a discount on arrangement fees, (iii) a discount on the interest rate, or (iv) not providing adequate security (and there are other conditions). Get your professional adviser to be anal on s554F ITEPA (and I mean really, really anal). The double tax relief rules will provide no help with this. And you get no tax back when you repay the bank.

9. If it is to do with an open year then you need to make sure that your tax adviser has got a lot of cold tea towels to understand the double tax relieving rules. And get them to sign in blood to say they work. In fact, that's probably not enough, ask for their kids to stay at your house until HMRC agree.

These are some thoughts off the top of my head. I've not researched it. I wouldn't touch it myself unless I was absolutely comfortable that HMRC understood what I was planning to do and agreed it in advance. A QC's opinion would not be worth the paper it is written on.

[webberg]

For anyone who has "settled" the Income Tax as part of CLSO 1 (similar settlement terms I believe), would there be any benefit in joining Big Group for dealing with the loans (given that your analysis is very different) ? I looked into the IHT (inc speaking to HMRC IHT team) and know that this is still hanging over us (scheme relevant). If you have a method which would take care of the loans and/or avoid IHT bill then I would be extremely interested.

The original CLSO dealt with positions up to 2011. If you have loans after that date, then yes, we can be relevant.

IHT is tricky. In our opinion HMRC has a position that is inconsistent with Rangers and which ignores the facts of the situation, regardless of Rangers. We cannot see how they can sustain that position but we're pretty sure that they will try their usual tactic of trying to outlast and outspend taxpayers in litigation. That will bring unfair pressure and amounts to a bullying campaign.

It's also a fact that HMRC in their announcements promise to "exit" you from tax avoidance. That is manifestly untrue and misrepresentation. Given that HMRC has recently had some schemes reprimanded for false advertising, I wonder if this is hypocrisy?

We are aware of where most of the loans are. We cannot claim that all of the lenders are willing or able to cooperate with us. We have a number of ways to bring (reluctant) cooperation but they may not work. Many lenders are happy to cooperate.

We cannot guarantee anything.

We have a view and plan and numbers and contacts in HMRC (no special line in, just contacts) and we are moving to execute that.

[jbeer]

Big Group has an analysis that it believes in and which, if correct, will produce an answer very different from the settlement terms issued on 7th November. It will also deal with the loans.
.

For anyone who has "settled" the Income Tax as part of CLSO 1 (similar settlement terms I believe), would there be any benefit in joining Big Group for dealing with the loans (given that your analysis is very different) ? I looked into the IHT (inc speaking to HMRC IHT team) and know that this is still hanging over us (scheme relevant). If you have a method which would take care of the loans and/or avoid IHT bill then I would be extremely interested.