Cash Component in trust

[sflint]

By doing a deed of variation and creating a DWT, how could one include cash as well as property? Can it be in the form of an IOU like the property? What are the tax implications for trustees or the beneficiary borrowing the cash?

[Lee Young]

Cash can be dealt with though the iu mechanism. As regards tax liability for the trustees, this would depend on the terms of the loan. If interest is payable then there would be income tax to pay - if the capital is index linked then it should be free of CGT.

For the beneficiary whatever is owed to the trust is not in his or her estate should he or she die. Therefore it would be deducted from their estate for IHT purposes.

[sflint]

Apologies for a probable stupid question but how does one make the capital index linked?
I assumed the amount of the loan would remain the amount of cash at point of death and the surviving spouse would place this value of cash in his/her account to accrue interest or use if ever needs it.

[Lee Young]

If the terms of the loan are recorded in writing - which I would suggest they absolutely must be - and if the WIll allows for this, then the capital amaount loaned can be increased by reference to an index such as the CPI or RPI, or a House Price index, increasing the amount owed, increasing the amount deductable and thereby increasing in a legitiamte way the tax saving on second death.

[sflint]

Thank you.
As the Will is going to be varied, I suppose it can be worded to allow what you suggest. So following the same reasoning,should the part of the loan regarding the property also not be a static amount and be index linked allowing for variation in house prices in the future?

[Lee Young]

Yes. Make sure the solicitor draftsman is up to the job. You should enhance the value by index-linking if there is a benefit to the beneficiaries - ie at the end of the day, even after the trust, the survivor's estate will be subject to IHT.

[sflint]

Thanks again. I think the solicitor might have been offering me something else: Cash to be invested in an account in trustees names which would involve annual tax returns and 40% tax on interest received.
Your solution sounds much more favourable to me.How do I go about trying to get above scenario established?
Which stage is critical? ie does the person doing the DoV need to be aware of above scenario or just the person implementing the assignment of debt?

[Lee Young]

The DOV is crucuial as it sets up the trust and the powers the trustees and the executors have.

I would be happy othelp if you wanted to contact me direct.

Lee Young
lxy@m-b.co.uk
Solicitor, TEP and Chartered Tax Adviser
Moore & Blatch Solicitors

Direct dial: +44 (0) 1590 625840
Fax: +44 (0) 1590 671224

www.mooreandblatch.co.uk

[sflint]

Thank you. Shall be in touch.