Interest free loan from beneficiaries to trustees

Interest free loan from beneficiaries to trustees

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Is there anything I am missing or can the above be done without falling fall of any anti avoidance provisions?
 
 
The trust has holds property subject to a capital repayment mortgage but a tax pool exists.  Therefore the income of the trust is required to service the capital element of repayment but the trustees would like the beneficiaries to recover the income tax paid.
 
 
Therefore is it possible for the trustees to pay income to the beneficiaries with tax credit for them to subsequently reclaim to the tax, and for the beneficiaries to then lend the money back to the trustees on interest free terms with an appropriate loan agreement drawn up (repayable on demand subject to a short notice period)
 
 
Any thoughts would be appreciated
 
 
Ben

Replies (5)

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By ACDWebb
25th Apr 2012 12:51

Do you not run the risk

of them becoming settlors and taxable on the trust income?

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By Paula Sparrow
25th Apr 2012 13:18

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. 

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Replying to FirstTab:
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By User deleted
25th Apr 2012 13:23

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

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By ACDWebb
25th Apr 2012 13:25

I merely threw it out there

It was a thought, but probably a rubbish one. I'll get my coat

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By Paula Sparrow
25th Apr 2012 14:05

Interest free loans

from the trust are potentially an issue in some circumstances.  Interest free loans to the trust do not cause a problem. 

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