Loan to pay IHT to Settlor Director or Trustees?

s455 and beneficial loan for loan to director/participator or trustees. Implications of CTM61525

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Discretionary trust's sole asset is shareholidng in a private investment close company settled by mother (the brains behind the company). There were three trustees and shareholders (mum, dad and daughter) and because the shares have never paid any dividends, there is no trust bank account or other trust funds.

There was a large £20,000 10 year anniversary IHT charge late last year but no trust cash to pay the bill. So the close company paid the IHT bill direct to HMRC. Shortly after paying the bill, mum died before any bookkeeping entry was made in the company books. Before the IHT was paid mum had a director's loan account credit balance of £11,000. Dad and daughter had zero balance director's loan accounts.

There was no paperwork to indicate if the IHT paid was a company loan to mother or to the trustees. The company accountant says it should be treated as a loan to mother whereas the solicitor is saying it should be a loan to the trustees.

S455 and beneficial loans are now in point. Dad is now happy to pay the £20,000 to the company for the company loan from his private funds if he is asked to.

CTM61525 is confusing me as is the beneficial loan aspect. (See link below)

My first thought is that s455 tax is payable on the net £9,000 (£20k - £11k) if the IHT paid is treated as a loan to mum, and no beneficial loan charge because the loan balance never exceeds £10,000.

But if the £20,000 is treated as a loan to the trustees, do we assume that the £20k is netted off against mum's £9,000 loan account credit balance for s455 and beneficial loan purposes (and why pick mum out from the three participators).

Because CTM61525 confirms that each trustee is treated separately, is HMRC permitted to choose any of the trustees as targets for the s455 and/or beneficial loan tax charges for a loan to the trustees.

In other words, could HMRC decide that it was dad or daughter as trustee who had borrowed the money from the company as CTM61525 seems to imply.

I think the company accountant's advice may be best. That way we get to offset mum's credit loan account balance with no questions being asked.

What do you think.














Replies (2)

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By Tax Dragon
26th Mar 2024 05:21

I think the accountant is thinking about tax (and maybe not thinking very clearly) and the solicitor is thinking about law. I can also well understand why the solicitor wants to leave mum (and more particularly her estate) out of it.

If you're going to pretend that one payment represents two loans - from the company to mum then onwards from mum to the trust - then the trust now owes mum's estate. The executors need to call that debt in, which creates a problem.

You propose that dad makes a payment, and that payment is treated as a new loan to the trust, a repayment of the loan from mum (now her estate) and the repayment of the loan from the company.

That's a lot of smoke and mirrors to obscure what appears to be a non-issue, for either tax or law. There is no current s455 charge, and there never would be an employment-related loan (cheap or otherwise) but for your fun and games multiplying up the transactions.

Caveat: I am taking the facts as presented.

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By taxdigital
26th Mar 2024 08:21

As the settlor's intention isn't known, and will never be known, I suggest treat it as a distribution to the shareholders. Loan to participator - not too sure.

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