If someone repaid the loans would the tax liability go away?

[DonkeyRhubarb]

Let's say someone received loans totaling £100,000. HMRC is probably assessing in the region of £40,000 in tax.

(1) If the person repaid the £100,000 would the tax liability go away? What about part repayment, would that reduce the tax liability pro rata?

(2) After repaying the loan, the £100,000 would now be sitting in the Trust. Could this be paid out when the person was not working, thereby reducing the tax burden? Could it even be held for retirement?

(3) If it is a Family Trust could it be paid to other family members who are in a lower tax bracket?

(4) If someone starts repaying the loan, can HMRC still argue that it wasn't a genuine loan?

[meanttobeworking]

I asked this question about a year and a half ago to a lady that worked at Edge at the time, and she laughed and said "it's not quite that simple". However, I don't think anyone can argue that if I'm making repayments against a sum of money that someone else gave me, it would be considered a loan and not a salary/gift/"other income".

[webberg]

Let's say someone received loans totaling £100,000. HMRC is probably assessing in the region of £40,000 in tax.

(1) If the person repaid the £100,000 would the tax liability go away? What about part repayment, would that reduce the tax liability pro rata?

(2) After repaying the loan, the £100,000 would now be sitting in the Trust. Could this be paid out when the person was not working, thereby reducing the tax burden? Could it even be held for retirement?

(3) If it is a Family Trust could it be paid to other family members who are in a lower tax bracket?

(4) If someone starts repaying the loan, can HMRC still argue that it wasn't a genuine loan?

The following is my opinion and others are available. (The lady from Edge is correct, it's not simple).

1. No. HMRC's argument is that there is no loan. The legal form is ignored and instead the economic reality is used. That reality is that money has passed to contractor as a result of his effort on project X. In order to maintain that stance, they have to argue that the loan doesn't exist for income tax purposes. Repayment in whole or part would call into question the substance over form argument BUT a Judge is obliged to look at the position at the time the loan is made and not subsequent action, especially this long into the enquiry and as such i think the act of repayment would have little impact upon the analysis.

2. if the loan is repaid, then the trustee has cash. You would need to look at the terms of the trust as to their ability to hold that cash or distribute it. (Would you really want an IoM trustee doing this for 10, 20, 30 years?)

3. Possibly. Depends on the terms of the trust. It's possible that the distribution to settlor or a party connected to the settlor, at the request of the settlor, would be seen as an income distribution which could be taxable.

4. Yes. See 1 above.

One project we're working on is to bring the trust assets of our members into one place (probably a company owned by the members) so as to remove the trustee from the equation and instead deal directly with the IoM Government who seem anxious to rid themselves of the embarrassment all this has caused.

If that can be achieved then there is considerable flexibility in putting together an exit programme.

I think that there are ways to view the loans that vary from those of HMRC but these pretty much rely upon the argument that "if they're not loans, what are they?" rather than "These are loans".

As I said, I'm sure every set of 4 responses here will create 5 more opinions.

[DonkeyRhubarb]

The following is my opinion and others are available...

Thanks.

[Iliketax]

One project we're working on is to bring the trust assets of our members into one place (probably a company owned by the members) so as to remove the trustee from the equation.

Have you thought about getting the trust to pay the receivable to the individual's spouse?

[webberg]

Have you thought about getting the trust to pay the receivable to the individual's spouse?

I've thought about a lot of options.

Some I've rejected.

Some I'm still looking at.

Some are ready to be discussed with IoM lawyers and Government.

Some I think are ready to go.

[lucozade]

Haven't Glasgow Rangers proved at FTTT and UTTT that the loans were not income and therefore not taxable?

[webberg]

Haven't Glasgow Rangers proved at FTTT and UTTT that the loans were not income and therefore not taxable?

Until the case is final, they've proven nothing.

It's also the case there that the loans were arguably driven off the image rights of the club/player and not perhaps connected with the salary element of their jobs as footballers. i reckon HMRC will drive a distinction from that fact if they actually lose eventually.

Just saying.

Make no mistake though, unless HMRc do make that distinction stick, losing the case will be a blow. Look out also for UBS/DB which is in Supreme Court soon.

[StrengthInNumbers]

Also important to note as it goes higher up in courts more and more it becomes independent of political views. UBS and DB were both lost at lower courts if I remember correct and decision got reversed in higher courts. HMRC knows that based on current decision loans are not loans is a weak argument and thus they have shifted to ToAA instead. Eagerly awaiting next set of decisions.