Nil Rate Band Trust - index linked debt by way of charge over property

Nil Rate Band Trust - index linked debt by way...

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Hi, I am a beneficiary of a nil rate band discretionary trust that's sole asset is a CPI indexed linked loan secured by a charge on a house … I imagine there are large number of these from 10 years ago …  i am trying to understand whether the index linking is considered capital, income or perhaps neither and whether an IHT 100 is due. HMRC's view seems to be, although not specific to trusts !, (per SAIM2240) that if no interest is charged on a loan any "premium" or "discount" is income. If income, HMRC state per SP8/86 that if the income is "undistributed and unaccumulated income it should not be treated as a taxable trust asset"  .... does anyone have any view on whether an index linked element of a loan of this type is income, capital or neither ?... and whether there is any 10 yearly charge due on the basis that a loan from 2004 (£263k) uplifted by CPI potentially exceeds the current nil rate band of £325k at the 10 year anniversary. Thanks !

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By Stuart.thomson
31st Oct 2014 01:51

Index-linking is not a premium but a form of variable interest. The fact that some people choose to calculate it by indexing the capital balance is fine although technically it is just all payments but the outstanding balance which is usually index-linked.

I am not a trust expert but cannot see how the index-linking element would different from normal corporate loan treatment.

Hope you get a resolution.

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By AndyRylance
22nd May 2015 15:11

IHT Trusts

I can help.

I have one of these trusts myself and with the help of a solicitor found out the answer (and with HMRC).   Index linking is in effect the person that is owed the money charging an interest rate on the money owed until such time as it is repaid.    Most index linking is matched to a published government interest rate such as CPI, or RPI.   HMRC seem happy to accept that as an approved rate.

On payment out of the trust the index linked money is considered "earned" by the trust, much as if the capital had been invested in the stock market and done well.   It is trust income.   Although generally not taxed coming into the trust it is taxed going out.  All trust income is taxed at a rate up to 45%.   If that income is paid out to non taxpayers or lower rate taxpayers they can in turn claim the proportion of overpaid tax back.   However the trustee must pay the initial tax to HMRC, give the recipient a copy back of an official form to prove that the tax has been paid and at the end of the tax year the beneficiary can claim some of the tax back depending on their earnings and how much tax they have paid (for example a non taxpayer earning nothing in the year, such as a child could claim up to their free tax allowance back on the tax of 45%).

HMRC warned me that the law is always in flux and changing so always worth keeping up to date, however if I hear of any changes I will try to remember to put it here!

 

 

 

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By Paula@Butt
22nd Jul 2022 15:53

Hi, I know this is a long time ago, but I am looking at one of these beastly index linked loan arrangements right now. As far as I am aware, nothing has changed since this query was raised in 2014/2015 but would like to double check with Andy that he is not aware of any changes.

Many thanks

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Replying to Paula@Butt:
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By Tax Dragon
22nd Jul 2022 17:31

It's worth noting that OP concerned IHT and Andy's response was about taxing income.

What are you doing?

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Replying to Tax Dragon:
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By Paula@Butt
22nd Jul 2022 17:43

I am looking at the correct tax treatment of an index linked Nil rate band trust. I was interested in Andy's response as Taxation magazine has a different view but that was back in 2010.

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Replying to Paula@Butt:
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By Tax Dragon
22nd Jul 2022 20:17

I take very few posts in here as authoritative. Some posters seem to know their onions (as Justin puts it), but with only two recorded posts to their pen name here, there's precious little for you to base your trust in Andy on and I would suggest you don't rely too heavily upon their comments.

A couple of points: Andy's response was IMHO incorrect in relation to tax before the trust pays out. If there was a profit on payment of the debt, that would be taxable as income at that time.

There could also be tax on no apparent profit as the value when the debt was settled may have been substantially less than face value and deeply discounted security rules could apply.

Also (in OP's case anyway - of course yours may be different) the debt is second hand so not CGT exempt.

There's probably more, but as your situation may be very different (is the debt payable on demand? Only after death? Secured? Not secured? How did it arise? etc), there's not a whole lot of point in speculating. If you want to post more details, perhaps start a new thread and see if anyone can help.

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