If the facts are as you suppose (which may well be so, although I do not think that that is quite as clear from what the querist has said as you suggest) and the interest and capital will be returned in due to course to the querist, then the brother is merely the querist's bare trustee and there can be no doubt whatever that he is taxable on the interest. I accept that the settlements provisions would not then be in point. I did not intend to take issue with that interpretation if those are indeed the facts.
The issue I was addressing was whether, if the transaction could conceivably be characterised as a loan, as suggested by Ramnik, and whether the querist's brother kept the interest or not, this made any difference to whether the querist would be taxed on the income. In my view, and despite your comments, if there is a loan as Ramnik suggests, there is a statutory settlement in which the querist has retained an interest and he is therefore taxable on the income arising, whether his brother keeps the interest or not.
The first question which needs to be asked in testing that hypothesis is whether a loan is prima facie a settlement within the meaning of section 620(1) ITTOIA 2005. I am not aware of any authority which suggests that it is not, and certainly the Inland Revenue thinks it is - see IR Helpsheet IR270 which says "...when you lend money you are a settlor and retain an interest in the property...". The legislation originally enacted as Section 45 Finance Act 2000 specifically provided that, with effect from 6 April 2000, loans to charities are not to be considered to be settlements within the settlements provions, and were it not the case that loans generally are settlements, that legislation would be clearly otiose.
Obviously, if a loan is a settlement for these purposes, as I maintain is the case, then it is by definition one in which the settlor has retained an interest (as defined in section 625 ITTOIA 2005).
The next question is whether there is an element of bounty. Frankly, it seems to me to be obvious that the fact that a loan is interest-free constitutes the required element of bounty. If, as you suggest, it does not, I find it very difficult indeed to imagine what does! My view is entirely contrary to yours; theer will always be an element of bounty unless the loan is made on terms where the lender does not "lose out" on the transaction.
I should be interested in knowing the reasons for your view that my analysis is incorrect.
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