Preserving a protected trust with lending

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Where offshore trusts have been structured for an individual becoming UK deemed domicile, potential ‘tainting’ implications, particularly those related to lending, are now front of mind.

Tainting occurs when value is added to the trust after it has been established, by the addition of assets or income. In the context of lending, there are circumstances where inter-trust (or related trust) loans will trigger a ‘value added’ event. The result of tainting the trust is loss of its protected trust status for income, as well as capital gains tax purposes.

The exclusions to this are limited. The first being any income or property added to the trust in compliance with a legally binding contract entered into prior to 6th April 2017. The second, being a loan arrangement with the trustees on an ‘arm’s length’ basis, meaning the loan is made at the official rate of interest, or above. This rate is currently 2.5% and the interest would need to be treated and paid in the same way as a commercial loan with a third party would be.

There are disadvantages, however, a margin of 2.5% could be grossly uncompetitive in the current lending market, dependent on the details and circumstances of the lend. The trust would also be taking on the lending risks entering into an ‘arms length’ loan, something not in the normal course of its own business.

Tainting can also still occur if a ‘relevant event’ occurs; where interest is capitalised, interest payments are missed or if terms vary which result in the loan no longer being commercial. Trustees now need to carefully ensure none of these events occur around any inter-trust loans they are making or receiving.

Third party lending is a safe solution for trustees with lends that carry the risk of tainting; securing an external provider of lending not only moves the lending risk to a third party, but completely dissipates the ability to taint the trust with lending. With UK property in particular, we see pricing below the official rate of 2.5% regularly, potentially providing a cost saving for clients too.

ALC works with best practice fiduciaries, equipping trustees with the information they require to make informed credit decisions. Our lending reports act as an audit trail for trust files and our one-off arrangement fee is only levied upon successful draw down of a suitable lending solution. Our goal is to create transparency in the offshore lending market, always representing the borrower to secure optimal lending for whatever circumstances they may have.