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Review summary

Loan Trust

A loan trust enables a settlor to make a gift of the growth on a loan while retaining unrestricted access to the loan capital.

The growth on the investment is outside the settlor’s estate for IHT purposes.

Essentially, the settlor makes a loan to a trust, which then invests the money.

The trust has received a loan from the settlor, not a gift, so there is no immediate IHT liability in most circumstances.

Customer Reviews
Expert Verdict

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.


The Pros

> Growth in value is immediately outside settlor's estate
> Assists with inheritance tax concern (on future growth) yet still provides a tax-efficient income source and access to capital if necessary
> The amount loaned to the trust will not result in a PET or CLT as no gift is actually made

The Cons

> Amount of outstanding loan will remain within the settlor's estate for IHT purposes
> If you write off the loan, you make a gift at this point at which point you then setup a PET at this stage.
Why is no PET or CLT created on the creation of the trust?

By using a loan trust you make a loan rather than a gift, as such the assets remain inside your estate for IHT purposes.

When can I recall the loan?

Depending on the structure used to hold the investment, up to 100% of the capital loaned to the trust can be redeemed. The growth on the trust, outside of your estate is property of the trust and is not accessible by the settlor.

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Expert Assessment of a Loan Trust

A Loan Trust can be a useful solution, but whether it is applicable has to be determined on a case-by-case basis.

The case for using trusts in general also needs careful consideration on an individualised basis.

If you already have a trust structure in place and would like a second opinion - or, if you are wondering whether the utilisation of a trust could be of benefit in your personal circumstances contact our trust experts for comprehensive, highly qualified advice.

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