Settling and writing off loans

[howcanigetyoualoan]

Thank you everyone for comprehensive answers.

So if the IHT charge is a running charge from inception, it sounds like it makes sense for us to have the loans released now I.e. not wait for any settlement offer from HMRC, in order to prevent further costs running up.

Is there any downside in doing this?

[webberg]

Thank you everyone for comprehensive answers.

So if the IHT charge is a running charge from inception, it sounds like it makes sense for us to have the loans released now I.e. not wait for any settlement offer from HMRC, in order to prevent further costs running up.

Is there any downside in doing this?

Yes.

A loan release where the funding for that loan is part of a disguised remuneration scheme, creates a taxable event upon you.

The law was changed to make this specific charge apply from April 2017.

Doing this without agreement from HMRC that the tax has already been settled, will result in the charge applying and the extent to which that charge is covered by an earlier liability or how it works with the loan charge in 2019, is really quite complicated.

In theory, you should not pay tax more than once on the "same" amount. In practice, I'm not sure that the current crop of rules achieves that and therefore you may have to rely upon HMRC's word that they will not make more than one charge.

This is untested waters for me and I may know more in a month or two, once HMRC has responded.

[ScottW]

Just giving this thread ‘bump’ in case anybody else is in the same boat as me and can shed any light on the issue.

I’m in the process of settling my Contractor Loan scheme with HMRC (whilst holding my nose).

Inheritance Tax will be applied if the loan is written off adding a fair lump to the bill.

I seem to be able to settle without having the loan written off and save the Inheritance Tax lump sum.

I have no idea of the long term implications of the latter option.

Does anybody know?

[Pennydroppers]

Just giving this thread ‘bump’ in case anybody else is in the same boat as me and can shed any light on the issue.

I’m in the process of settling my Contractor Loan scheme with HMRC (whilst holding my nose).

Inheritance Tax will be applied if the loan is written off adding a fair lump to the bill.

I seem to be able to settle without having the loan written off and save the Inheritance Tax lump sum.

I have no idea of the long term implications of the latter option.

Does anybody know?

The amounts will still be liable to the Loan Charge?

[webberg]

You can settle and have the loan written off within the permitted time and that produces an IHT or not dependent upon the type of trust.

(In reality as HMRC's IHT team are running a contrary analysis to that used for income tax, the application of IHT is a lottery).

If you choose not to write the loan off, or cannot, then no IHT is due via the settlement.

Dependent upon HMRC's analysis, IHT may fall due on the 10th anniversary of the trust - use around 1% per annum of the loan value as a guide for the IHT due, and this may be covered by your lifetime allowance.

If the loan is subsequently released/written off/repaid and the trust dissolved, an exit charge may arise.

If you settle then HMRC claim that the loan charge will not apply (but until very recently have been reluctant to confirm it in writing).

[ScottW]

You can settle and have the loan written off within the permitted time and that produces an IHT or not dependent upon the type of trust.

(In reality as HMRC's IHT team are running a contrary analysis to that used for income tax, the application of IHT is a lottery).

If you choose not to write the loan off, or cannot, then no IHT is due via the settlement.

Dependent upon HMRC's analysis, IHT may fall due on the 10th anniversary of the trust - use around 1% per annum of the loan value as a guide for the IHT due, and this may be covered by your lifetime allowance.

If the loan is subsequently released/written off/repaid and the trust dissolved, an exit charge may arise.

If you settle then HMRC claim that the loan charge will not apply (but until very recently have been reluctant to confirm it in writing).

So if your trust has (according to HMRC) produced IHT you can decide to settle without having the loan written off? This would then avoid the 2019 loan charge?

If I understand Webberg correctly that means HMRC may apply IHT every 10 year anniversary of the loan?

So for argument sake if you were loaned £200,000 every 10 years you would have to pay HMRC £2000?

[webberg]

So if your trust has (according to HMRC) produced IHT you can decide to settle without having the loan written off? This would then avoid the 2019 loan charge?

If I understand Webberg correctly that means HMRC may apply IHT every 10 year anniversary of the loan?

So for argument sake if you were loaned £200,000 every 10 years you would have to pay HMRC £2000?

Yes you can choose not to write off. If you settle there is no loan charge.

Yes an anniversary charge may arise every 10 years from the start. Some dates may have already passed.

The charge for IHT (as a rough estimate) is 1% per annum. So for 10 years, that's 10% and the charge in your example, is £20,000.

[Calmbeforethestorm]

You can settle and have the loan written off within the permitted time and that produces an IHT or not dependent upon the type of trust.

(In reality as HMRC's IHT team are running a contrary analysis to that used for income tax, the application of IHT is a lottery).

If you choose not to write the loan off, or cannot, then no IHT is due via the settlement.

Dependent upon HMRC's analysis, IHT may fall due on the 10th anniversary of the trust - use around 1% per annum of the loan value as a guide for the IHT due, and this may be covered by your lifetime allowance.

If the loan is subsequently released/written off/repaid and the trust dissolved, an exit charge may arise.

If you settle then HMRC claim that the loan charge will not apply (but until very recently have been reluctant to confirm it in writing).

I must admit Im well confused by the IHT argument when a loan is written off. HMRC guidance on loan settlement states "IHT charges may be relieved if the payment from the trust giving rise to the charge is also treated as income. "

Surely if the amount that was loaned is being treated as income and taxed in the settlement ( a distribution if you like) then cancelling the loan at the same time ( or within 30 days) shouldn't give rise to any IHT.I suppose if interest had been added to the loan then the write off of the interest might as this is specifically excluded form the settlement and the LC itself.

[ScottW]

Yes you can choose not to write off. If you settle there is no loan charge.

Yes an anniversary charge may arise every 10 years from the start. Some dates may have already passed.

The charge for IHT (as a rough estimate) is 1% per annum. So for 10 years, that's 10% and the charge in your example, is £20,000.

Ah! So its 1% per annum. I thought it was 1% every 10 years. That changes things. I’d be as well settling and paying the IHT to get it over and done with rather than facing the 10% every 10 years. Thanks for your clear reply.

[webberg]

I must admit Im well confused by the IHT argument when a loan is written off. HMRC guidance on loan settlement states "IHT charges may be relieved if the payment from the trust giving rise to the charge is also treated as income. "

Surely if the amount that was loaned is being treated as income and taxed in the settlement ( a distribution if you like) then cancelling the loan at the same time ( or within 30 days) shouldn't give rise to any IHT.I suppose if interest had been added to the loan then the write off of the interest might as this is specifically excluded form the settlement and the LC itself.

The loan is not being treated as income. The reverse is happening.

In Rangers, the Judges decided that when the money fell due to the employee, it was taxable as income.

Subsequently the employee and employer must have agreed that some money (already taxable under section 62 ITEPA) would be paid to a trust (settled) and the trust would lend it back to the employee. This is a subsequent action to the time at which tax liability on the income arose.

This is the core of the conflict in the HMRC analysis for income tax and IHT.

For income tax, liability arises when the money becomes due.

For IHT purposes, HMRC claim that the money went to the trust and was loaned to you.

I think that those are mutually exclusive positions. HMRC disagree. the debate continues.