Protective Trust and Loans

[anon123]

I have a protective trust under which Mr X & Mrs Y each have a pre March 2006 IIP. What are the inheritance tax consequences of the trustees making interest free loans to the children of Mr X and Mrs Y?

The trust deed permits the trustees to "pay or transfer any part of the capital to or for the benefit of any one or more of them the said Mr X or Mrs Y and their children".

An advance of capital to the children absolutely would result in a partial termination of the IIP which would be a PET because an individual has become absolutely entitled. This is just a loan to the children so are there any IHT consequences for the trustees or the current IIP?

[anon123]

I have been thinking about this a bit more....If capital was advanced to a person other than a principal beneficiary then there would be an IHT charge as if the IIP has come to an end (PET in this case). If they gave the money to the children outright this is a PET. If the trustees appoint funds away from the person with an IIP there is an IHT charge so the key issue must be whether or not the capital loaned to the children still forms part of the IIP. Presumably it does and we have replaced one asset (cash) with another (loan). Any thoughts?

[Loza]

Anon
I think the IIP continues in the case of a loan as you suggest, I am less certain as to whether S633 would have effect to treat the loan as income of the settlor (to the extent that there is undistributed income)

[Brooke]

The trust can invest and enter into loan arrangements. The issue for UK tax purposes, is with whom does it enter these arrangements with. If you are interested in a solution that bypasses this issue, then please contact me on the following details at your convenience:

Liam Brooke
Director, Tax and Investment Services
Portland Financial Management SA
5th Floor, 7 Rue de la Croix d'Or, 1204 Genève, Switzerland.
Tel : +41 (0)22 592 78 00
Mob : +44 (0) 7921 025380
Email : liam.brooke@portland-sa.com