Settling and writing off loans

[Aunewbie]

Looking for some advice on settling loans with HMRC. One of the questions they ask is whether it is intended to get the loans written off within 30 days if settlement. Has anyone done this? Are we potentially liable to pay inheritance tax immediately or can they charge this in years to come?

[howcanigetyoualoan]

Looking for some advice on settling loans with HMRC. One of the questions they ask is whether it is intended to get the loans written off within 30 days if settlement. Has anyone done this? Are we potentially liable to pay inheritance tax immediately or can they charge this in years to come?

I’ve been asking this for a while on this forum but nobody has confirmed that they have. Or what IHT charge was applied. Or why a fee is being charge by the trust in some cases is being charged for loan write off (and if this relates to an iHT charge suffered by the trust upon write off / loan release). Seems to be the one big sticking point in the whole settlement process for final closure. Plenty of conjecture around but nobody seems to know.

[webberg]

The posters above are conflating a number of unrelated issues.

The tax position and the loan write off position are largely independent. The only place they touch is in the question of IHT liability.

Tax position

The HMRC offer basically says that all loans are taxable income. The loan value is added to your other income in the year and the tax due is calculated. Deduct tax paid and that is what you owe.

Interest is added from the due date of liability, usually 31st January following the year end.

If you settle then HMRC claim that IHT could be due in some instances. (This is not a position that we agree with but changing the analysis and mind set of HMRC's IHT office promises to be a long and painful process.)

IHT can be due where the loan is written off. The rate would be around 1% of the loan value per year the loan has been in existence.

If the loan is not written off (through choice or because the lender will not play ball) then no IHT immediately but perhaps later as some trusts have a 10 year anniversary charge and eventually something has to happen with the loan (repay, write off, etc).

Loan

HMRC is not part of the loan agreement and therefore cannot have any influence on whether the lender writes the loan off or not.

Some lenders like to pretend that tax law and actions from HMRC mean that they have "no choice" but to ask you to repay the loan, or attempt to sell you a piece of paper that says your loan is written off because HMRC "require" proof of this.

That is incorrect.

I'll not speculate here as to why this is happening, but the general rule is don't pay anybody anything without taking advice. (This includes a tax adviser and most of us will give you a free initial call).

Hope this helps.

[CDJ]

The posters above are conflating a number of unrelated issues.

The tax position and the loan write off position are largely independent. The only place they touch is in the question of IHT liability.

Tax position

The HMRC offer basically says that all loans are taxable income. The loan value is added to your other income in the year and the tax due is calculated. Deduct tax paid and that is what you owe.

Interest is added from the due date of liability, usually 31st January following the year end.

If you settle then HMRC claim that IHT could be due in some instances. (This is not a position that we agree with but changing the analysis and mind set of HMRC's IHT office promises to be a long and painful process.)

IHT can be due where the loan is written off. The rate would be around 1% of the loan value per year the loan has been in existence.

If the loan is not written off (through choice or because the lender will not play ball) then no IHT immediately but perhaps later as some trusts have a 10 year anniversary charge and eventually something has to happen with the loan (repay, write off, etc).

Loan

HMRC is not part of the loan agreement and therefore cannot have any influence on whether the lender writes the loan off or not.

Some lenders like to pretend that tax law and actions from HMRC mean that they have "no choice" but to ask you to repay the loan, or attempt to sell you a piece of paper that says your loan is written off because HMRC "require" proof of this.

That is incorrect.

I'll not speculate here as to why this is happening, but the general rule is don't pay anybody anything without taking advice. (This includes a tax adviser and most of us will give you a free initial call).

Hope this helps.

Would also add - IHT appears to be utterly complex and getting a straight answer - even from HMRC's IHT team - is problematic. We've been trying to get EBT Loans written off for some years now and the final position we got to was that the Trust wouldn't write off the loans because (in their opinion) the Trustee would be liable for the IHT charge - HRMC weren't sure.. so we just sit here waiting..

Raises one question - maybe one for Webberg or Phil - one of the avenues that HMRC was pursuing to prove that the loans were taxable was that the arrangement was a sham - given that, is there an avenue one could pursue to tell the Trustee "This was a sham, i don't recognise this as a loan - put up or shut up effectively".. ??

[webberg]

Would also add - IHT appears to be utterly complex and getting a straight answer - even from HMRC's IHT team - is problematic. We've been trying to get EBT Loans written off for some years now and the final position we got to was that the Trust wouldn't write off the loans because (in their opinion) the Trustee would be liable for the IHT charge - HRMC weren't sure.. so we just sit here waiting..

Raises one question - maybe one for Webberg or Phil - one of the avenues that HMRC was pursuing to prove that the loans were taxable was that the arrangement was a sham - given that, is there an avenue one could pursue to tell the Trustee "This was a sham, i don't recognise this as a loan - put up or shut up effectively".. ??

I'm not sure that "sham" has been part of the argument from HMRC.

Certainly the Supreme Court squared the circle in the Rangers case by saying that the sum of money became taxable on the "employee" at the point it became due to him/her.

Subsequently, the employee must have either paid an amount to the trustee or agreed to an amount to be paid to the trustee. That money was subsequently loaned back to the employee.

I would say that most professional trustees would have a real issue in admitting that they were part of a sham.

Some trusts/trustees involved in the schemes were perhaps acting in a less professional capacity and would be more likely to feel the pressure of such a claim. However many have become essentially untraceable.

You also need to be careful about what you wish for.

If the trust/contribution/loan was a sham then why are you arguing that now and did not realise at the time the money was paid? Is that failure careless, deliberate, negligent?

We then have the incomprehensible analysis and approach of the HMRC IHT unit.

Not only do they not actually know what the IHT is for well known schemes, they argue that for IHT purposes they can follow the literal interpretation of the documents, many of which were frankly window dressing, rather than the approach taken for income tax purposes which is to identify facts and apply the law to the facts. They apparently see no contradiction in that position and presumably think that a Court will uphold the use of two contrary interpretations of tax law. Barmy.

[Iliketax]

Raises one question - maybe one for Webberg or Phil - one of the avenues that HMRC was pursuing to prove that the loans were taxable was that the arrangement was a sham - given that, is there an avenue one could pursue to tell the Trustee "This was a sham, i don't recognise this as a loan - put up or shut up effectively".. ??

Sham has a meaning in normal conversation. But is also has a specific meaning in law which is a lot narrower that what a normal person would describe as a sham. If you are interested, have a read of this: http://www.kessler.co.uk/wp-content/...not_a_sham.pdf

Once you have read it, you will realise that the original scheme promoter and the trustee will have done their best to make sure that there was no sham. And that there is no way that a professional trustee will concede to being involved in a sham.

I'm not sure that "sham" has been part of the argument from HMRC.

HMRC said that the loans were not a sham in Rangers. I'm not aware that its been argued in other loan / EBT cases. It's occasionally mentioned in other cases (e.g. like Tower MCashback) and while the tribunal might think that there are lots of artificial features, it is very unusual to say there was a sham (even if they say it is very close to a sham or a higher court hints that there might have been).

[demby]

HQ Quiz App

Not sure if you've heard of the HQ app where they give cash prizes for answering a series of questions. One prize was $250,000.

What would be the issue with us giving our trustees £1000 (say 250 people did this) - they would have £250,000 to give away as a cash prize.
This could then be used to repay a loan. This repayment goes back in to the prize pot to be won by another person. This continues until all loans of the 250 are repaid. The trustee then keeps the £250,000 for expenses etc. Our liability just £1000. Loan repaid in full.

[webberg]

Not sure if you've heard of the HQ app where they give cash prizes for answering a series of questions. One prize was $250,000.

What would be the issue with us giving our trustees £1000 (say 250 people did this) - they would have £250,000 to give away as a cash prize.
This could then be used to repay a loan. This repayment goes back in to the prize pot to be won by another person. This continues until all loans of the 250 are repaid. The trustee then keeps the £250,000 for expenses etc. Our liability just £1000. Loan repaid in full.

So you have circularity of funding and the same money used 250 times.

You have not a lottery but a guaranteed payment to every participant.

You have the trust running a lottery in contravention of trust law.

Nice idea (and not too dissimilar to some we have seen) but hopeless I'm afraid.

[CDJ]

Sham has a meaning in normal conversation. But is also has a specific meaning in law which is a lot narrower that what a normal person would describe as a sham. If you are interested, have a read of this: http://www.kessler.co.uk/wp-content/...not_a_sham.pdf

Once you have read it, you will realise that the original scheme promoter and the trustee will have done their best to make sure that there was no sham. And that there is no way that a professional trustee will concede to being involved in a sham.

HMRC said that the loans were not a sham in Rangers. I'm not aware that its been argued in other loan / EBT cases. It's occasionally mentioned in other cases (e.g. like Tower MCashback) and while the tribunal might think that there are lots of artificial features, it is very unusual to say there was a sham (even if they say it is very close to a sham or a higher court hints that there might have been).

Firstly - thanks to both Webberg and ILikeTax for replying - although i think my original post gave some ambiguity. I settled my EBT years ago under CLSO 1 after advice from my tax advisors - part of that advise was that assuming HMRC lost Rangers and their option A (for my scheme) of Tranfer of Assets abroad, they would likely try applying similar principles to the Boyle case (Loans in high inflation currencies nullified with FX deals or similar) - hence the sham comment (which I can see wasn't helpful in that context).

So for me the tax question is settled (aside from the joy of IHT which no-one seems prepared to give any sort of meaningful answer to) - but one thing that struck me was whether I could argue with the trustee that the loan was not a valid arrangement - so tell them "I don't recognise that the "loan" was a valid commercial transaction, I received a disbursement from the trustee which i have paid all taxes on" or similar? it may well be fanciful, but then so is paying a trustee £1000 to do 15mins work (if they are willing to actually do said work because of the threat of potential IHT liability)

[webberg]

So for me the tax question is settled (aside from the joy of IHT which no-one seems prepared to give any sort of meaningful answer to) - but one thing that struck me was whether I could argue with the trustee that the loan was not a valid arrangement - so tell them "I don't recognise that the "loan" was a valid commercial transaction, I received a disbursement from the trustee which i have paid all taxes on" or similar? it may well be fanciful, but then so is paying a trustee £1000 to do 15mins work (if they are willing to actually do said work because of the threat of potential IHT liability)

I think I and Iliketax have been as clear as we can be in IHT. HMRC has no sensible analysis and seem to make arbitrary decisions.

(Just today, whilst dealing with a settlement for a client, HMRC asked for a copy of a trust deed for a scheme because "we don't have one").

We find that once settlement of the tax has been agreed, most trustees are more than happy to release/write off loans. I accept that under CLSO 1 the outcome of doing that was rather uncertain, but we did that for a few.

Arguing that the trustee has somehow not conducted themselves in accordance with trust law in making a non valid loan is unlikely to win you any friends. I think a simple request telling them you have settled, should get you a sensible answer.