Reply to: 2019 Loan Charge and APNs

[Iliketax]

I have trust deeds but can't see anything like that, any idea what else to look for? Who might I contact to have the deeds looked at? I don't have a clue where to start.

You'd need to talk to your tax adviser but s86 would be a good place to start - https://www.legislation.gov.uk/ukpga/1984/51/section/86

[Iliketax]

What is the IHT rate then?

Anyway my trust is not an EBT, its actually a FURB, now EFRBS.

A FURBS is a particular type of an EBT and is normally a s86 trust. Rates are in s70(6): https://www.legislation.gov.uk/ukpga/1984/51/section/70

[Calmbeforethestorm]

If the trust is a s86 trust then you are wrong. The rate is not 40% and the IHT threshold is not relevant.

I'm guessing many / most pre-DR employee benefit trusts would be s86 trusts. If you have a copy of the trust deed you may be lucky and find a clause that says something like "The trustee can't do anything to stop s86 applying". Although it might be in more legal-type words that include things like "notwithstanding anything to the contrary express or implied no power or discretion may be exercised by the Trustees so as to prevent this Trust Deed being within the provisions of section 86 IHTA".

What is the IHT rate then?

Anyway my trust is not an EBT, its actually a FURB, now EFRBS.

[starstruck]

If the trust is a s86 trust then you are wrong. The rate is not 40% and the IHT threshold is not relevant.

I'm guessing many / most pre-DR employee benefit trusts would be s86 trusts. If you have a copy of the trust deed you may be lucky and find a clause that says something like "The trustee can't do anything to stop s86 applying". Although it might be in more legal-type words that include things like "notwithstanding anything to the contrary express or implied no power or discretion may be exercised by the Trustees so as to prevent this Trust Deed being within the provisions of section 86 IHTA".

I have trust deeds but can't see anything like that, any idea what else to look for? Who might I contact to have the deeds looked at? I don't have a clue where to start.

[Iliketax]

I have loans in excess of £325k which is the IHT threshold is it not?

if I settle and then have the loans written off then , unless my particular Trust structure falls outside the scope of IHT ( which it may ) then I will face 40% on the income and then 40% IHT on the amount written off over £325k.Will I not?

Happily there is no interest as all the loans predate 2009 but are after 1999.

Did I miss something or am I wrong??

If the trust is a s86 trust then you are wrong. The rate is not 40% and the IHT threshold is not relevant.

I'm guessing many / most pre-DR employee benefit trusts would be s86 trusts. If you have a copy of the trust deed you may be lucky and find a clause that says something like "The trustee can't do anything to stop s86 applying". Although it might be in more legal-type words that include things like "notwithstanding anything to the contrary express or implied no power or discretion may be exercised by the Trustees so as to prevent this Trust Deed being within the provisions of section 86 IHTA".

[Calmbeforethestorm]

And "failure to correct" penalties...

I must admit I'm confused why you, Calmbeforethestorm, think IHT is as big an issue as you say. Have you taken specific advice based on your own circumstances? In particular, taking account the type of trust it is, the timing of the various transactions, why those transaction occured, the valuation of the loan receivable, etc? If so, what in your circumstances makes it such a big issue? What makes the 45% go up to 80%?

I have loans in excess of £325k which is the IHT threshold is it not?

if I settle and then have the loans written off then , unless my particular Trust structure falls outside the scope of IHT ( which it may ) then I will face 40% on the income and then 40% IHT on the amount written off over £325k.Will I not?

Happily there is no interest as all the loans predate 2009 but are after 1999.

Did I miss something or am I wrong??

[Iliketax]

Looks like anyone with a loan balance over £325k is going to face 80% tax on anything over that amount then.

Thats perfectly fair.

Don't forget interest.

And "failure to correct" penalties...

I must admit I'm confused why you, Calmbeforethestorm, think IHT is as big an issue as you say. Have you taken specific advice based on your own circumstances? In particular, taking account the type of trust it is, the timing of the various transactions, why those transaction occured, the valuation of the loan receivable, etc? If so, what in your circumstances makes it such a big issue? What makes the 45% go up to 80%?

[webberg]

Looks like anyone with a loan balance over £325k is going to face 80% tax on anything over that amount then.

Thats perfectly fair.

Don't forget interest.

[Calmbeforethestorm]

Let's assume that you were in regular employment and every penny you were paid was subject to PAYE.

Your employer pays you £100 and deducts say £40 tax and NI and you have £60.

You decide that you want to set aside money for your children/spouse/good causes. You therefore put that £60 into trust.

You have reduced your net wealth by the £60. IHT is a tax on wealth so subject to various exemptions, that is potentially taxable immediately or at some future date.

You speak with trustee and decide that as there is no immediate need for the £60 to be distributed to the beneficiary, then instead the money will be loaned to you.

That is a transaction between the trust and you and as your are the settlor (i.e. created the trust), HMRC will see that as your potentially placing money outside of your estate (net wealth) by making the contribution, but still enjoying the benefits of it. As you might expect, IHT charges are likely and these happen every 10 years and/or when the loan is finally resolved.

Let's say the loan is written off because the beneficiaries disappear. You have benefitted and the trust is now dissolved. There is an exit charge on the value of the benefit.

So, the money might be "the same" (although strictly money is fungible and no £20 note or whatever can be traced to a particular transaction) but upon receipt by you as salary it is taxable.

By the time it has gone through the trust and reappears with you as a loan, it is trust money you are using and that has its own tax regime, part of which is IHT.

Not the same money, not from the same source, not subject to the same rules.

Looks like anyone with a loan balance over £325k is going to face 80% tax on anything over that amount then.

Thats perfectly fair.

[webberg]

Agree, HMRC are painting this nightmare scenario for those who choose not to settle and to wait for the LC to kick in, as their vastly preferred option is settlement.

My guess will be that those who wait for the LC will be affected by huge delays at HMRC as they try to gather the info they need from promoters / trusts who may or may not still be around.

!

Be very clear.

HMRC will not try to get what they want from promoters/trusts.

The law is very clear.

The promoters/trusts have obligations to report to HMRC - it is not for HMRC to chase them.

If the promoter/trust is not doing that, then the obligation falls on YOU THE BORROWER.

Again, HMRC will expect to be told what they need and will NOT come chasing.

This is not an example of the nanny state doing everything.

YOU need to take action and push HMRC every step of the way.

[webberg]

If you've paid an APN you can apply to postpone the loan charge:

https://www.gov.uk/guidance/disguise...he-loan-charge

Only of the APN paid is more than the loan balance.

[webberg]

No I was referring to the potential 45% bracket rather than 40%.

Why is IHT not double taxation....I realise its a separate tax but its still taxing the same income more than once.

Let's assume that you were in regular employment and every penny you were paid was subject to PAYE.

Your employer pays you £100 and deducts say £40 tax and NI and you have £60.

You decide that you want to set aside money for your children/spouse/good causes. You therefore put that £60 into trust.

You have reduced your net wealth by the £60. IHT is a tax on wealth so subject to various exemptions, that is potentially taxable immediately or at some future date.

You speak with trustee and decide that as there is no immediate need for the £60 to be distributed to the beneficiary, then instead the money will be loaned to you.

That is a transaction between the trust and you and as your are the settlor (i.e. created the trust), HMRC will see that as your potentially placing money outside of your estate (net wealth) by making the contribution, but still enjoying the benefits of it. As you might expect, IHT charges are likely and these happen every 10 years and/or when the loan is finally resolved.

Let's say the loan is written off because the beneficiaries disappear. You have benefitted and the trust is now dissolved. There is an exit charge on the value of the benefit.

So, the money might be "the same" (although strictly money is fungible and no £20 note or whatever can be traced to a particular transaction) but upon receipt by you as salary it is taxable.

By the time it has gone through the trust and reappears with you as a loan, it is trust money you are using and that has its own tax regime, part of which is IHT.

Not the same money, not from the same source, not subject to the same rules.

[Dmac]

Seems to me hmrc are being deliberately vague on what position paying the loan charge leaves you in. Logic would dictate that paying the loan charge settles any income tax liability.

The deliberate vagueness seems to be to try and get as many settlements as possible. Whether that is any indication on how confident they are on being able to exercise the loan charge, is anyones guess.

Agree, HMRC are painting this nightmare scenario for those who choose not to settle and to wait for the LC to kick in, as their vastly preferred option is settlement.

My guess will be that those who wait for the LC will be affected by huge delays at HMRC as they try to gather the info they need from promoters / trusts who may or may not still be around.

These delays may take years as the under-resourced HMRC struggle under the weight of the tasks they have to complete - however when they do eventually get their act together I would expect them to charge additional interest on top of the LC to account for the delays. And even then, paying the LC is NOT settling, so this will also be hanging over those who wait for LC.

All in all, not very satisfactory at all!

[Pebbles]

If the LC is less than the settlement plus IHT it must make sense to go that route, pay an extra 5% and leave the loans in perpetuity.If your loans are in excess of £325k it looks unwise to settle, especially if the loans are pre 2011 and settlement excludes any interest.Thoughts please.

Can you leave the loans outstanding in perpetuity? A trust cannot exist in perpetuity; it has to come to an end at some point. And when it does, there is likely to be a tax charge. Plus there are costs associated with running a trust. There is also the risk of yet more changes to legislation. On a completely different front, it could affect your ability to borrow in future as, technically, you should declare the loans on any mortgage / loan applications. Plus paying the LC does nothing to resolve the tax position for earlier years, if enquiries are open. Doing anything now which leaves the loans outstanding is not really a solution; its just putting off the day when you have to face up to the debts. I can't really see how paying the LC is the right answer for anyone.

[RickG]

Paying the loan charge is not settling anything. You still need to reach a settlement.

Seems to me hmrc are being deliberately vague on what position paying the loan charge leaves you in. Logic would dictate that paying the loan charge settles any income tax liability.

The deliberate vagueness seems to be to try and get as many settlements as possible. Whether that is any indication on how confident they are on being able to exercise the loan charge, is anyones guess.