Offshore Trust Loans to beneficiaries

[pcg007]

Hello everyone!

I have an interesting situation which I am having a bit of trouble getting my head round and would appreciate any comments:

- Offshore Trust, formerly an A&M but both beneficiaries gained an IIP prior to the 2006 changes.
- Both beneficiaries are UK resident and domiciled.
- The Trust has considerable stockpiled gains from a very successful investment in the early 90s.
- Since then there have been significant losses but the trust value, several £Ms is almost entirely due to the early 90s gain.
- There is little or no income
- The trustees have made substantial loans to the beneficiaries
- Interest has been charged on these loans at rates of 1-2% above base rate, but the beneficiaries have never paid this interest

The question is - what are the tax consequences of the beneficiaries repaying the loans to the trust?

If the interest IS NOT paid by the beneficiaries, do we have a s87 benefit charge either:
- a notional interest benefit of the accrued interest is subject to a BIK matched with the stockpiled gains, or
- do we have to look back and match the benefit to each year the loan has been outstanding and adjust the beneficiaries tax position in each year.

If the interest IS paid by the beneficiaries the trust will presumably therefore have interest income. Are the beneficiaries going to therefore effectively pay income tax on the interest they pay to the trust because they have an IIP.

Grateful for any comments or contributions

pcg007

[Anthony Nixon]

If the interest is not paid, there is certainly a s87 charge. This was decided in the 2001 case of Billingham v Cooper.

If a loan is expressed to be interest free, the taxable “capital payment” is taken to be the "official rate" that is applied to charge income tax on beneficial loans from employers, which is currently 4%. It sounds as if this will be more than the current rate under the loan agreements linked to base rate, and it is the official rate that HMRC will assess to CGT under s87.

You will need to go back and calculate each year's benefit using the official rate for the year. Because the gains were realised in the 1990s the beneficiaries will have to pay the increased rates of tax – up to 64% for the years when CGT was 40%.

If the interest is paid, there is still likely to be a benefit charge on any difference between what is paid and the official rate. And yes, there is an income tax charge, perverse as it seems, even though the beneficiary is effectively paying him or herself.

Given the sums involved, I would usually check this sort of problem with tax counsel to see if there any other ways of easing the tax situation. Alternatively I have colleagues who specialise in this area if you would like to contact me.

Anthony Nixon CTA TEP Solicitor
Partner, Thomas Eggar LLP, Southampton and Chichester
anthony.nixon@thomaseggar.com
023 8083 1224

[chomp]

is there any equivalent guidance on loans to beneficiaries from a UK DT?