Anyone repaying loans - who "owns" the funds

[Kragon]

Hi,

looking at the option of re-mortgaging an unencumbered property to repay an outstanding loan.

As I am close to retirement age could I then drawdown the funds from the trust over 10 years, limiting any income tax / NI during that period and living off my sugar daddy, and deferring my actual personal pension for 10 years

Who controls the funds the trusts "manage" (I know it's the trust, but what are their obligations?) - how can they legally be accessed?

Thanks,
K

[Loan Ranger]

Beware of the "earmarking" provisions of LC19.

[Kragon]

Hi LoanRanger - sorry a bit new to all this - what is "earmarking" - what is included in the 2019 legislation specific to this?

Logically (not one of my strengths) is that those funds are deposited for my benefit, one way or another, and if not via loan then how is that benefit to be realised?

Thanks,
K

[Loan Ranger]

Earmarking

If you repay the loans, with the intention of benefiting from the money, then the repayment itself can trigger an immediate tax charge on the whole lot, even if you haven't actually received any of the money back.

HMRC are likely to treat any repayment as suspicious ie. motivated by the avoidance of LC19.

How would they find out if you were intending to benefit from the money? They'll ask the Trustees of the trust, who will have earmarked the money for you.

[Kragon]

Thanks LoanRanger that helps.

My confusion remains over who the funds are supposed to benefit. From pages on this website, my understanding of EBTs, the purpose is to distribute funds when advantageous to do so:

https://www.contractoruk.com/ebt

The employer establishes the trust making contributions of an equivalent value to the deferred remuneration and the trustees will – at a later date – distribute the trust funds to employees or ex-employees. The basic idea is that the trustees can distribute the trust fund when it is tax advantageous to do so – perhaps when the employee is retired or non-UK resident.

The ideal is that there is no employee tax charge until the trustees distribute benefits – which may be many years after those benefits have been earned. The tax charge may be theoretical rather than real – the employee or ex-employee may have moved to a ‘low tax jurisdiction’ or ‘tax haven.’



So if the funds are not intended to benefit those who put into the fund, where is the money supposed to go?

[Loan Ranger]

So if the funds are not intended to benefit those who put into the fund, where is the money supposed to go?

Well, therein lies the problem. Any money in the trust would ordinarily be for the benefit the beneficiary (you), which is why repaying the loan could be caught by the earmarking provisions of LC19.

[Theythinkitsallover]

Earmarking

Well, therein lies the problem. Any money in the trust would ordinarily be for the benefit the beneficiary (you), which is why repaying the loan could be caught by the earmarking provisions of LC19.

Earmarking is fine as long as "tax is paid" on the redistribution of the funds. Where that tax has to be paid is a question that still remains unanswered - and probably one that will only be able to be tested through the courts.

[Albert49]

Pension ?

Earmarking is fine as long as "tax is paid" on the redistribution of the funds. Where that tax has to be paid is a question that still remains unanswered - and probably one that will only be able to be tested through the courts.

So, if for example I have £400,000 of loans, and had/could borrow the cash, could I repay the loans and have the trust pay it back to me over 10 years at £40k per year, and make a pension contribution of £40k each year and thus in effect transfer all of the loan into my pension ? IE similar to the idea of using a large pension contribution in 2018/19 to reduce the LC, but is not limited to the annual pension limits.

[Iliketax]

Earmarking is fine as long as "tax is paid" on the redistribution of the funds.

No. Earmarking creates a tax charge under the normal DR rules.

[Iliketax]

So, if for example I have £400,000 of loans, and had/could borrow the cash, could I repay the loans and have the trust pay it back to me over 10 years at £40k per year, and make a pension contribution of £40k each year and thus in effect transfer all of the loan into my pension ? IE similar to the idea of using a large pension contribution in 2018/19 to reduce the LC, but is not limited to the annual pension limits.

You can do that. But there will be a tax charge on £400,000 when the trustee earmarks the funds for you. The exemption is s554R(1)(c) ITEPA 2003 does not apply because the sum that the trustee received came from you. Mention that when you take your own independent, professional tax advice.

With an upfront earmarking charge there would not be a tax charge when the money is eventually paid to you (so you would not get pensions tax relief in later years).

Just to be clear, if the trustee was not going to be earmarking it for you (or your family, etc) why on earth are you repaying it?