Repaying the Loan to the Trust?

[Scottie99]

I just wondered what the opinions on this forum would be to repaying the loan back into the trust if one has the funds to do so.

Also, any thoughts as to the next steps if one did that?

[webberg]

I think a couple of hours researching this question and its implications would be a good investment.

Keeping things at a high level and not getting into the details I will summarise my view as follows:

1. Why would you pay money to a trust unless you could be assured of receiving it back?
2. How much would the trust want in fees?
3. If the money came back to you, immediately or later, chances are it creates a tax charge on repayment
4. The repayment of the loan will NOT stop HMRC enquiries into years in which the loan was paid NOR the loan charge which has extensive provisions to prevent the charge being avoided by certain mechanisms.
5. There are double tax relief rules between the final situation agreed for the years the loan is made and the loan charge. I am not convinced that a loan repayment followed by a distribution would enjoy the same protection. In other words there is a possibility of a double tax charge, no matter what HMRC may promise.

We do not recommend repayment of loans.

Rather we look to have loans written off post settlement or post agreement of the final position.

I'm sure others have their own opinions.

Ultimately however this is not a simple solution and you have to do your research and arrive at an opinion or position that suits you.

[Calmbeforethestorm]

I think a couple of hours researching this question and its implications would be a good investment.

Keeping things at a high level and not getting into the details I will summarise my view as follows:

1. Why would you pay money to a trust unless you could be assured of receiving it back?
2. How much would the trust want in fees?
3. If the money came back to you, immediately or later, chances are it creates a tax charge on repayment
4. The repayment of the loan will NOT stop HMRC enquiries into years in which the loan was paid NOR the loan charge which has extensive provisions to prevent the charge being avoided by certain mechanisms.
5. There are double tax relief rules between the final situation agreed for the years the loan is made and the loan charge. I am not convinced that a loan repayment followed by a distribution would enjoy the same protection. In other words there is a possibility of a double tax charge, no matter what HMRC may promise.

We do not recommend repayment of loans.

Rather we look to have loans written off post settlement or post agreement of the final position.

I'm sure others have their own opinions.

Ultimately however this is not a simple solution and you have to do your research and arrive at an opinion or position that suits you.

Definitely concur with 1,2 and 3 above.
4.Interesting point.... I agree with the first part....for sure its seems odd that HMRC/Stride should say that repaying loans clears up the tax position.....bit like being caught shoplifting, paying for or handing back the goods and then there being no " punishment" for the original " crime", they do both say it avoids the loan charge so long as the loans are properly paid back in cash and I think, because they are trying to argue the LC is a "new " tax and not retrospective it seems likely repaying loans will negate the LC itself. I know of people doing this ( not for contractor loans ) but for certain EBT style schemes, especially where there are other assets remaining in the scheme.
5.Again, following the principle of no double taxation its logical that repayment of the loans followed by a distribution at a later date or dates would incur tax at the point of distribution.If this is not, the case then HMRC guidance and Stride are misleading everyone including parliament.There is the question of a contradiction ( at least one) in the legislation whereby the repayment of a loan may be considered a relevant step for earmarking purposes but I have seen conflicting advice on this and no one seems certain what the effect of repaying loans would be.I guess HMRC never really considered the possibility that many would consider this a viable option... not least because they dont have the money.

Certainly the thought of repaying loans , not paying any tax now and then redrawing the cash from some sunny place where there is no tax might be attractive to some I would think.....or even redrawing it over 10-20 years at a lower rate is conceivable in some circumstances.

[Delendog]

Definitely concur with 1,2 and 3 above.
4.Interesting point.... I agree with the first part....for sure its seems odd that HMRC/Stride should say that repaying loans clears up the tax position.....bit like being caught shoplifting, paying for or handing back the goods and then there being no " punishment" for the original " crime", they do both say it avoids the loan charge so long as the loans are properly paid back in cash and I think, because they are trying to argue the LC is a "new " tax and not retrospective it seems likely repaying loans will negate the LC itself. I know of people doing this ( not for contractor loans ) but for certain EBT style schemes, especially where there are other assets remaining in the scheme.
5.Again, following the principle of no double taxation its logical that repayment of the loans followed by a distribution at a later date or dates would incur tax at the point of distribution.If this is not, the case then HMRC guidance and Stride are misleading everyone including parliament.There is the question of a contradiction ( at least one) in the legislation whereby the repayment of a loan may be considered a relevant step for earmarking purposes but I have seen conflicting advice on this and no one seems certain what the effect of repaying loans would be.I guess HMRC never really considered the possibility that many would consider this a viable option... not least because they dont have the money.

Certainly the thought of repaying loans , not paying any tax now and then redrawing the cash from some sunny place where there is no tax might be attractive to some I would think.....or even redrawing it over 10-20 years at a lower rate is conceivable in some circumstances.

HMRC/Stride did not saying that repaying the loan cleared up the tax position. He said repaying the loan removes the 2019 LC,nothing else.

[Calmbeforethestorm]

HMRC/Stride did not saying that repaying the loan cleared up the tax position. He said repaying the loan removes the 2019 LC,nothing else.

I stand corrected, I can't find it on their guidance.... but it is on most of the articles written by Tax specialists.

Perhaps, it will only be on closed years that HMRC would be unable to take any further action if loans are repaid.

I await expert opinion.... and probably from the horses mouth as well as the deadline draws near.

[Jaxonius]

Expert opinion?

I stand corrected, I can't find it on their guidance.... but it is on most of the articles written by Tax specialists.

Perhaps, it will only be on closed years that HMRC would be unable to take any further action if loans are repaid.

I await expert opinion.... and probably from the horses mouth as well as the deadline draws near.

You are more likely to meet God than get a definitive answer to this or anything connected to UK Tax...everyone has an opinion (with a disclaimer) the only player who is consistent is HMRC who simply say - PAY.....and they are often less of an expert on their own legislation than anyone!

[Calmbeforethestorm]

You are more likely to meet God than get a definitive answer to this or anything connected to UK Tax...everyone has an opinion (with a disclaimer) the only player who is consistent is HMRC who simply say - PAY.....and they are often less of an expert on their own legislation than anyone!

Yes I imagine you're right.

But the settlement process could be used to test this theory.

[kentishlad]

Could you pay back the loan say a £1 a week? You are still repaying the loan then...

[webberg]

Repaying the loan and taking it back at some sunny day in the future and paying the tax then, is not an option.

If the lender receives the funds and earmarks them for your account, that is the liability trigger.

Not some sunny future date, but rather the day after the repayment.

[Calmbeforethestorm]

Repaying the loan and taking it back at some sunny day in the future and paying the tax then, is not an option.

If the lender receives the funds and earmarks them for your account, that is the liability trigger.

Not some sunny future date, but rather the day after the repayment.

Taken from HMRC own website, part of spotlight on schemes claiming to avoid the LC>

These schemes don’t work. The only way you can avoid the new loan charge is by making a genuine repayment of the loan balance or settling the tax liability with HM Revenue and Customs (HMRC) in advance. Any repayments connected to a new tax avoidance arrangement will be ignored and the loan charge will still apply.