IHT in settlement calculations

[KRAMB]

Under s72, IHT will be due only when loans are written off. I understand this!

Confusion is around s86. As I understand, under this section IHT is still due.
(a) If so, when?
(b) How is this calculated? ie is it every 10 years or on death.

I would really appreciate if someone can shade some light on this matter.

Given the below from Paper IHTM42986 and the HMRC view that Loans are not Loans and are to be construed as Income for Tax purposes does this provide relief from IHT under S72 , hence no charge

--- Start of Extract from IHTM42986
IHTM42986 - Employee benefit trusts: property leaving employee benefit trusts: treated as income

Where the property leaving the trust is treated as income for Income Tax purposes there will be no charge under IHTA84/S72 by virtue of IHTA1984/S70(3)(b). This applies where the payment is (or will be) income in the recipient’s hands for Income Tax purposes (or would be if the participator were resident in the UK and subject to Income Tax). This relief will only apply in limited circumstances:

it is important that it is the actual payment leaving the trust that is subject to Income Tax.
there must be clear evidence, not just a vague possibility, that the payment out will be liable to Income Tax, as suggested by the words ‘or will be’.

For example, if a loan is made to beneficiary and a beneficial loan Income Tax charge arises, the relief does not apply.
--- End of Extract

[SimonJones]

IHT

Under s72, IHT will be due only when loans are written off. I understand this!

Confusion is around s86. As I understand, under this section IHT is still due.
(a) If so, when?
(b) How is this calculated? ie is it every 10 years or on death.

I would really appreciate if someone can shade some light on this matter.

[meanttobeworking]

And if that's the case, is there scope for the loans to be partially written off, year by year, with each amount falling below the £325k threshold, until the balance is nil?

[holymoly23m]

IHT on estate

I have a question related to our estate and IT on loans related to the £325K bracket.

When we all die we will have an estate, including housing, pension, investments etc. Then there are years worth of "loans".. Assuming all of this equates to over 315K does IHT apply to the lot for our kids?

[neil99]

I used to be with Edge, but on my CLSO is says IHT is due.
Although it reads that the IHT under section 86 is applied but it then goes onto saying that the charges are under section 72(c).

What I'm falining to understand here is, on one hand IHT is under section 86 (meaning out of scope of IHT), but on the other hand the charges are under 72(c).

Would really appreciate if you could shade some light on this as I'm totally consfused!

It also transpires that although on the same scheme, various people are getting their CLSO with IHT included and some don't. Isn't this strange? Should'nt it be all or no-one for the people on the same scheme?

There is not a joined up policy here. The CLSO probably should have left IHT out all together but warned settlers that about the potential future liabilities arising from the use EBTs. Even in the SO they've left the door open re IHT for those who have agreed to pay the alleged section 72(2)(2) charges.

[neil99]

I'll do a deeper delve over the weekend and report back.

From what I have in front of me it may be that HMRC consider some Edge users to have agreed/accepted that the loans are worth less than they were (triggering a section 72 charge) whereas others (perhaps not part of whatever group has reached that agreement) have not.

In any event it appears that the trustees may not have bought in to this idea given the lack of communication with their beneficiaries.

For some of the litigation groups (Penfolds etc) where people have gone for settlement the premiss was that the the scheme organisers would arrange with the trustees to have the loans forgiven. But as we have found out they the CLSO are asking for IHT on the Sec 72 trusts irrespective on any indication from the trustees about the status of the loans.

I think I am restating what you've just written! However in my initial settlement letter I was told IHT would not apply then I wrote back asking for a calculation of IHT liabilities and now that sum seems to have crept into the final settlement offer.

[jbeer]

To a a vs employment income

Would IhT still be applicable if employment income legislation was being used rather than to a a ? Probably clutching at straws here but my understanding is that if it goes to litigation, hmrc may switch to employment income legislation depending on the outcome of ongoing cases.

[webberg]

I used to be with Edge, but on my CLSO is says IHT is due.
Although it reads that the IHT under section 86 is applied but it then goes onto saying that the charges are under section 72(c).

What I'm falining to understand here is, on one hand IHT is under section 86 (meaning out of scope of IHT), but on the other hand the charges are under 72(c).

Would really appreciate if you could shade some light on this as I'm totally consfused!

It also transpires that although on the same scheme, various people are getting their CLSO with IHT included and some don't. Isn't this strange? Should'nt it be all or no-one for the people on the same scheme?

I'll do a deeper delve over the weekend and report back.

From what I have in front of me it may be that HMRC consider some Edge users to have agreed/accepted that the loans are worth less than they were (triggering a section 72 charge) whereas others (perhaps not part of whatever group has reached that agreement) have not.

In any event it appears that the trustees may not have bought in to this idea given the lack of communication with their beneficiaries.

[SimonJones]

I should be more precise.

In calculating a charge, it's the Actual rate x loss to trust.

Where we're looking at a section 86 trust, the "loss to trust" = NIL unless your loans plus other lifetime gifts exceed the nil rate band, currently £325,000.

Section 72 deals with "special" trusts and is a separate charge.

I understand Edge is a section 86 in terms of HMRC perception.

I used to be with Edge, but on my CLSO is says IHT is due.
Although it reads that the IHT under section 86 is applied but it then goes onto saying that the charges are under section 72(c).

What I'm falining to understand here is, on one hand IHT is under section 86 (meaning out of scope of IHT), but on the other hand the charges are under 72(c).

Would really appreciate if you could shade some light on this as I'm totally consfused!

It also transpires that although on the same scheme, various people are getting their CLSO with IHT included and some don't. Isn't this strange? Should'nt it be all or no-one for the people on the same scheme?

[jbeer]

section 72 for edge

My understanding is the edge scheme satisfies section 86 and therefore no 10 year charge applies. However, section 72 does apply when the Loans are written.off.
Would be delighted if I've got that wrong!

[webberg]

I should be more precise.

In calculating a charge, it's the Actual rate x loss to trust.

Where we're looking at a section 86 trust, the "loss to trust" = NIL unless your loans plus other lifetime gifts exceed the nil rate band, currently £325,000.

Section 72 deals with "special" trusts and is a separate charge.

I understand Edge is a section 86 in terms of HMRC perception.

[LetsGoSailing]

This might be a stupid question ("there's no such thing as a stupid question"), but I don't think I've come across an answer to it;

• What is the best case scenario?

Assuming HMRC lose all the cases and loans stay as loans, they don't then form part of our income, and therefore no additional income tax is due, and everyone is happy.
What happens next? Will the loans get passed from generation to generation, sometimes attracting IHT, sometimes not, but either way keep rearing their head in HMRC's eyes every 10 year anniversary?

[jbeer]

So for Edge, where no interest rate was applied, from what you are saying, i'm assuming we are caught by IHTA84/S72(2)(c) ? From the HMRC manuals this states....

If the trustees write off a loan, a charge will arise under IHTA84/S72(2)(c) on the fall in value of the trust fund. This applies whether the recipient is a person within IHTA84/S72(3) or not. This is likely to equate to face value of the loan where it was granted at a commercial rate of interest; or the value of the right to repayment where the loan was granted on favourable terms.

Just not sure I understand what "the value of the right to repayment" means ? The Real value of the loan at the time of write off ?

[webberg]

Seems to be a lot of discussion on this.

I offer the following.

HMRC seem to be saying that the trusts (lenders) will fall into one of two categories.

Section 86 trust or a section 72 trust.

A section 86 trust is one that attracts a tax charge on either a distribution (exit) of assets from the trust or every 10 years.

The exit charge is based on the "loss to the trust" x actual rate.

The loss to the trust is generally the amount distributed or the reduction in value of trust assets if the loans are agreed (with HMRC*) as being worth less than their original value.

The anniversary charge is based on the value of assets at that date.

The actual rate is arrived at via a formula which I can make available (as it's public property).

The net result of this however is that where the distribution/value is less than your NIL RATE BAND for IHT (£325k) then the actual rate will be 0%.

I suggest that few will have loans higher than that?

So apart from using the mention of liability to scare you into accepting, HMRC will only see some IHT in many years from now perhaps, but a liability on the scheme is unlikely.

The charge under section 72 is one that relates to "special" trusts. In this case the assumption is that an employment benefit trust exists and that where loans are agreed (with HMRC*) as being written off, a charge arises.

This charge is 0.25% per full quarter between trust start and date of charge. (If the trust continues beyond 10 years - and has an anniversary charge - then the rate reduces to 0.2% per quarter).

The calculations here for some schemes assume that the loans have become worth less than their original value. In some instances this may be a result of discussions between some groups and HMRC and in other cases, appears to be a unilateral decision by HMRC. Either way, you should take steps to establish why HMRC consider the loans have fallen in value.

There is a challenge to be made on firstly why the trust might fall into section 72 in the first place and secondly why the loans are now worth less than their original value.

* Note that the alleged reduction in loan value is something that is agreed with HMRC for the purposes of tax only. There is no suggestion that the trustees will actually agree nor that they may forgive you the liability. For some groups this may be the case but if so, I have not seen any evidence.