Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about taxation of a beneficiary of a will trust.
‘Our client, Mr X, died many years ago. His wife, Mrs X, and a local solicitor were trustees and executors of the will. The will left his limited company shares, which were wholly owned by him, to a will trust, which is discretionary in nature.
His daughter, who works for the company, is going to be lent a large sum of money from the company. Accordingly, a form P11D will be prepared.
The daughter is named as a potential beneficiary of the will trust.
I have two questions:
- Will tax under CTA 2010, s 455 be payable as a result?
- Would it be possible to exclude her as a beneficiary to avoid the s 455 tax?
I look forward to receiving replies from readers.’ Query 19,869 – Uncertain.
Terry Jordan’s reply: The loan must be made to a participator or their associate
‘When Mr X died, he left shares in a wholly owned company to a discretionary trust under his will, and I infer that they would have benefited from 100% business property relief under IHTA 1984, s 104.
This is still considered best practice on the first death for spouses and civil partners because it locks the relief in and prevents it being overridden by the spouse or civil partner exemption. This could be beneficial were the rules to change or the shares to be sold during the survivor’s lifetime.
Further planning is sometimes possible as the survivor could exchange what would be taxable assets on the second death for the shares which, once owned for two years, would again benefit from relief.
Mr X’s daughter, who works for the company, is to receive a large loan (presumably the de minimis provisions in CTA 2010, s 456(3) are not in point) and a P11D is to be prepared. Uncertain asks whether a liability under CTA 2010, s 455 will arise because of the loan and whether it would be possible to remove the daughter as a potential beneficiary of the will trust to avoid the charge. Such loans are treated as subject to tax at an income tax rate, but chargeable on the company as if it were corporation tax. It is worth noting that it is proposed that the dividend upper rate should increase to 33.75% on 6 April this year as part of the package of measures to fund the costs of social care and the NHS.
For s 455 to bite, the loan must be made to a participator or an associate of a participator.
On the face of it, the daughter is not herself a participator so is she an associate? Although her mother may not own shares in the company personally, she is a trustee of the trust which does own them.
HMRC’s Company Tax Manual at CTM61525 states: ‘Where the trust holds shares in a close company, any loan by that company to the trust will be chargeable because the trustee or trustees are all participators or associates of a participator (and each trustee will be a relevant person, either because that trustee is an individual or, in the case of a corporate trustee, because CTA 2010, s 455(6) makes them a relevant person).’
Consequently, the mother as a trustee is a participator in the company. As a result, the client’s daughter is an associate of hers because she is a relative (see CTA 2010, s 448(1) (a)). Accordingly, a charge will arise under s 455.
I did wonder whether a charge might be avoided by the mother retiring as a trustee. However, would this be caught by CTA 2010, s 464A? Further, is the daughter herself a participator (see CTM60160) by virtue of her interest in the shares as a beneficiary?
In my experience it would be unusual for the will to provide for beneficiaries to be excluded in future, but a potential beneficiary could achieve the same result by irrevocably assigning any rights to charity; however, that would not apparently remove the charge here.’
Our private client tax team have expertise in a range of areas including inheritance tax, trusts and family wealth. For more information, please get in touch with your usual BKL contact or use our enquiry form.