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Loan by benificiary to a discretionary trust

Are there any issues to consider when a beniciary makes a loan to a discretionary trust?

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I've not come across this before so wanted to check if there are any issues I need to be aware of. 

A discretionary trust owns let residential property which is in need of repairs the cost of which exceeds the trust's cash resources.  The sole beneficiary has funds and wants to make an interest free loan to the trust to enable the repairs to be done.

Are there any problems with this arrangement and will the loan need to be repaid before any future discretionary payments can be made to the beneficiary out of income?

 

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By Tax Dragon
13th Nov 2019 15:05

Sole beneficiary? Discretionary trust? I mean, the answer to the question is yes, but are you sure that you have a discretionary trust?

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By breakaway.barry
13th Nov 2019 15:49

Tax Dragon wrote:

Sole beneficiary? Discretionary trust? I mean, the answer to the question is yes, but are you sure that you have a discretionary trust?

The settlement was set up by a solicitor with two discretionary beneficiaries. One of these was subsequently removed by deed. The question was, are there any issues I should be aware of. If the answer is yes could you elaborate please.

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By Tax Dragon
13th Nov 2019 15:59

In the light of that further information, I would say none whatsoever, as what I believe you have is a bare trust.

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By breakaway.barry
13th Nov 2019 17:49

The settlement was set up 20 years ago as a discretionary trust and has been treated as such by HMRC for the whole period. There is no compulsion on trustees to pay out capital or income and there is power in the trust deed to add more beneficiaries. What makes it a bare trust?

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By Tax Dragon
13th Nov 2019 18:12

"Treated as such by HMRC." Is that really your answer? HMRC probably haven't read the trust deed - or, if they have, it was 20 years ago and they haven't seen, let alone read, the supplementary deed.

The power to add other bens may change the analysis. I don't know, IANAL. I do know that a trust with no discretion over who benefits is not discretionary - so, absent the power to add bens (ergo with no discretion over who benefits), you don't have a discretionary trust.

I also note that a 21+ yo trust, unless the terms have been changed, won't have the power to accumulate. If the trust is exactly 20yo, the power to accumulate may still exist but is likely to be about to end. If it has already ended, the trustees must distribute the income. With only one (current) beneficiary, there would be no discretion over who they paid the income to. In such a case, if the trust is not bare, it is IIP.

Anyway, the concerns I had on your question derived from the thought that lending on better-than-commercial terms (you didn't say otherwise) could make the ben a settlor.

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By breakaway.barry
14th Nov 2019 00:25

I will put your concerns to the trust's solicitors. In the meantime could we deal with my original question on the hypothetical basis that it is a discretionary trust.

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By Tax Dragon
14th Nov 2019 10:06

I've re-read your OP and notice you did say that the loan would be interest free. The beneficiary would not make an interest free loan to me. Even with a cast-iron guarantee of repayment, there's still a loss to the lender – an element of bounty. Bounty, settlement… they've been associated ever since Fletcher Christian and the Pitcairns (sorry… at least that's my tax joke of the day over with nice and early!)

My serious point is that, as I said in my previous post, a better-than-commercial (e.g. interest free) loan with an element of bounty could make the lender a settlor. You'd then have a beneficiary who was also a settlor. Tax consequences flow from that (I don't know whether s633 ITTOIA is related to Penny's point below, but such a connection doesn't really matter).

You might propose the counterargument is that there's no element of bounty, because the beneficiary knows they're the one that'll benefit. But that speaks to my point about whether the trust is discretionary. I don't think you can separate the two aspects of the analysis. Even hypothetically.

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By penelope pitstop
14th Nov 2019 00:38

Is the beneficiary a spouse of the settlor. If so watch out for De Vigier v IRC (1964) 2 All ER 907, (1964) 1 WLR 1073.

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