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I'm not sure how
a lender could be considered to be a settlor. That would have to at least involve waiving loan repayment so that the lender had made an addition to the trust. At the moment there is a capital injection into the trust, but this is balanced by a debt due to be repaid to the lender/beneficiary. What must be avoided is the Settlor making a loan to the trust. That invokes all sorts of nasty anti avoidance when the trust makes repayments.
It does make sense to make use of the tax pool where beneficiaries have allowances available to offset income. However, in practical terms the trustees would be advised to make sure that real money passes round the circle. There is also a possibility that HMRC could invoke Ramsay to cancel out the tax repayments as all that has really happened is the family have obtained a tax advantage.
In view of the circular nature of the transactions I would also want to see enforcable loan agreements to stop the structure looking like a sham.
Thanks for your reply, Paula
We are putting formal loan agreements in place repayable on demand subject to a short notice period, it's just the interest free point which the solicitor feels uneasy about, but I cannot see why it should really be in point
I merely threw it out there
It was a thought, but probably a rubbish one. I'll get my coat
Interest free loans
from the trust are potentially an issue in some circumstances. Interest free loans to the trust do not cause a problem.