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Trusts and taxation of index linked loans

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In the April edition of its Trusts and estates newsletter, HMRC has said it intends to write to all taxpayers known to have entered into arrangements under which trustees make loans to surviving spouses linked to the retail prices index. The letters will invite taxpayers to settle any income tax payable with HMRC. Such arrangements were relatively common before the introduction of the transferable IHT nil-rate band in 2007.

HMRC’s view is that, where these loans have been repaid to the trustees, the uplift in value above the principal sum initially lent constitutes interest under ITTOIA 2005 s 369(1), on which income tax is payable.

Where the trustees elect not to settle, HMRC will issue closure notices, against which there is the right of appeal. HMRC states that it has issued closure notices in a number of cases, none of which have been appealed. HMRC makes clear its intention to defend any resulting appeals before the tribunal.