What is a loan trust?
Loan trusts generally follow the same broad structure (although some early versions may include an initial starter gift):
- A trust is created,
- the settlor makes an interest free loan to the trustees,
- the trustees purchase an investment bond with the loaned capital,
- the settlor may recall the loan at any time.
The benefit of this is that the client can cap their IHT liability as any growth is immediately outside the estate. If loan repayments are spent the estate may even be reduced.
As the money is loaned to the trustees there’s no lifetime transfer for IHT and no gift with reservation. And all this achieved without losing access to capital as the balance of the loan can be recalled.
Of course, the outstanding loan remains an asset of the estate.
Loan trusts are tried and tested, and offer an IHT planning option that allows clients access to capital, but is also flexible enough to adapt to changes in future circumstances.
However, consideration should also be given to what clients want to do with any outstanding loan that forms part of their estate on death.
Investment in bonds keeps the ongoing administration of the trust simple, with no tax returns and no requirement to complete the new HMRC online trust register as long as there are no tax events.
Dave Downie is technical manager at Standard Life