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IHT Conundrum

My mother, who died 3 months ago, lent a considerable sum of money over 7 years ago to a Discretionary Trust as the settlor. Apart from the Trust Deed being drawn up, there was also a Loan Agreement, signed by my mother, who was also a Trustee, and another Trustee, both of them now deceased. Two major terms of the Loan agreement are as follows: (1) The loan shall be free of interest. (2) The loan shall be repayable by the Trustees immediately upon demand by the lender (my mother). It is this term that introduces a legal ambiguity into the arrangement. About a third of the loan has so far been repaid. The trust is to continue until the trustees decide otherwise. I am the Executor of my mother's estate. As far as I can tell, there are 3 ways of looking at this.

(1) The outstanding balance of the loan is repaid and therefore included in her estate, and thus the repayment suffers a not inconsiderable amount of IHT. (2) As my mother can no longer demand full repayment of the loan, it does not have to be repaid, if the executor of her estate, ie, myself, decides to waive the balance. (3) Following from (2), as there was no fixed time or event stated in the Loan agreement providing for full repayment of the loan, then at the date of the agreement a PET must have been made. My mother survived for the full 7 years from the time the loan was made. As two thirds of the loan is outstanding and does not necessarily have to be repaid, then this amount can be considered a PET from the outset, and therefore would not have to be included in her estate.

Finally in order for (2) and (3) to be effective, is there a document I would have to sign to make the waiving of the loan balance official, and most importantly would the Inland Revenue agree on with (2) and (3) ?

On supplementary page D8 to form IHT 200, 'Debts due to the estate' is a box where you are asked to state if any outstanding debt due to the estate should be excluded, and the reason why you think it should be. How should my explanation best be worded? Also on the same form the question is raised as to whether the lender and borrower are related. What is the purpose of this?

All constructive opinions gratefully received.

Frank

Reply to
Frank Booth Snr
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In message , Frank Booth Snr writes

Wasnt there a reservation though?

Reply to
john boyle

The question is both complex and may be incomplete inasfar as giving an accurate answer is concerned. If you get it wrong then the estate may end up paying too much IHT and you could also be liable for penalties from the Inland Revenue. You could also be personally liable to the beneficiearies as well. In the circumsatnces a few hundred pounds spent on paid professional advice from a solicitor specialising in IHT planning will, almost certainly be cheaper than the cost if you try to DIY. Indeed it should have been dealt with when the trust was set up.

Reply to
Peter Crosland

Well, we did pay a solicitor to set it up, and at the time it was well understood that the loan would have to be repaid. It was only after my Mum's death, when as executor, I ploughed through all the documents - Will, Discretionary Trust and Loan document, that I thought I spotted an anomaly in the latter. There was no provision for having to repay the loan, or the outstanding balance on my mother's death. But even after looking at the situation from different angles, the fact that she reserved the right to call in the loan, and that a part of it has been repaid, must imply that it was not a gift, and the intention was to repay her. I can't see how I really will have much of an argument against the CTO. I was just hoping someone out there in the legal profession may have just stumbled across a similar situation. I don't thik it's worth paying more money to a solicitor, because I'm fairly sure they're just going to confirm the same.

Thanks anyway.

Frank

Reply to
Frank Booth Snr

In message , Frank Booth Snr writes

It is the reservation that is the crux of it. But I am at a loss to know why the trust was created. Was it created more than ten years before her death? (I know it was more than seven).

Reply to
john boyle

All noted but remember you are up against the IR who are specialists in extracting money from the unwary and the potential cost would be low compared with the amount of money at stake.

Reply to
Peter Crosland

It was just under 10 years. I don't think the 'reservation' bit is relevant in this instance, because that applies only to gifts, and I'm referring to a loan. The trust was created by a 'gift and loan scheme', as operated by many life insurance companies. If you have a large sum of money, which you want to give away, but still need some of it to live on, you set up a discretionary trust. The settlor actually gives a nominal amount to the trust, say 100, then lends the trust a much larger sum, say 100,000, which is invested. The latter has to be repaid over 20 years, thus providing the lender with a tax free income. Meanwhile any gain made from investing the loan, belongs to the trust, not the lender's estate. That's the theory.

Reply to
Frank Booth Snr

As I said an expensive solicitor was employed back in 1995 to advise us. So why pay again for advice already given? After all, solicicitors are paid to be trusted. I've also come across this now, since last posting. Sec.166, IHTA 1984:

'In determining the value of a right to receive a sum it must be assumed that amounts receivable under any obligation will be received in full, unless recovery of the sum is impossible, or not reasonably practicable, and has not become so by any act or ommission of the person, to whom the sum is due'

I guess I've answered my own query now.

Frank

Reply to
Frank Booth Snr

In message , Frank Booth Snr writes

OK, just checking to see if a periodic charge had/was due.

Yes, a well established theory with which I am fully aware. I hadnt realsied it was a 'gift & loan'. But it doesnt provide Tax Free Income, it provides income which is 'free of tax to her' because usually the underlying investment is a Life Bond which pays tax internally but which you can withdraw 5% per annum tax free until all of the original capital is withdrawn and because it is in the bond the Trust has no CGT or IT to pay but it may (later if the bond has done really well) have to pay Inheritance Tax.

But as you were attempting to 'invalidate' the loan on the grounds that there was no compulsion for it to be repaid then it must revert to being a gift, and the ability of the lender to request repayment is a reservation, therefore making it a gift with reservation.

Reply to
john boyle

Yes, you're obviously clued up on this. But see the last paragraph of my previous reply re sec.166 IHTA. That derails any attempt to treat the loan or any balance of it as unpaid. So whichever way one looks at it, I'm stymied. Oh well!

Frank

Reply to
Frank Booth Snr

In message , Frank Booth Snr writes

Yes, now read that. Never mind!

Reply to
john boyle

Because there have been a lot of legislative changes and case law in the last nine years. The advice given nine years ago is unlikely to apply now. Or is the problem that you are anti-solicitor on principal? The other thing is that if you are an executor and can be shown to be negligent then it can cost you dear. Personally I look on it as insurance of a kind. If it saves money as well then so much the better. Certainly if you are handling an estate of the size suggested it is very unwise to do so without at least some professional help.

Reply to
Peter Crosland

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