Growth in the value of the underlying investment, above the amount of the outstanding loan, belongs to the trust.
It is not subject to IHT if the settlor dies.
Until the loan has been repaid in full, however, the outstanding balance will still be subject to IHT if the settlor dies.
The trustees can repay the loan by taking withdrawals from whatever they have invested the loan in.
The trust allows for single or joint settlors; the settlor is not a beneficiary but is entitled to repayment of their loan.
The creation of a loan trust is neither a potentially exempt transfer nor a chargeable lifetime transfer because nothing is given away on creation of the trust.
This type of trust can be suitable for those who are UK domiciled or deemed UK domiciled for IHT purposes, and who can afford to gift away future growth on their capital, but who may still require full access to the initial capital at some point.
A loan trust is ideal for anyone who requires flexibility as regards to frequency and amount of capital repayments but who doesn’t want to create either a potentially exempt transfer or chargeable lifetime transfer.