A Loan Trust
(Or A Gift And Loan Trust)
Trust is set up by an individual, either with a small gift of,
typically £3,000 i.e. an amount equal to the Annual Gift Allowance,
or on the promise of the loan to be made. The trustees are then
granted an interest free loan.
us assume that the loan made is £100,000. What are the benefits
of doing this, what advantages does it give and just as importantly,
what drawbacks does it have?
Whilst the full
amount of the outstanding loan will always remain in the Settlor’s
(the person that set up the trust and lent it the money) Estate, any
growth on the trust assets will be outside of the scope of IHT. However, the Settlor can
always ask for the loan to be repaid so they have not given away the
capital, only the growth on the capital.
us assume that the Settlor dies after 10 years and the investment
has grown at 6% p.a. (in this example we shall not consider any tax
liabilities other than IHT, but of course they do need to be taken
into account. We shall
also assume that none of the £100,000 loan has ever been
repaid. After 10 years,
the value of the trust’s investment would be worth £179,085, but of
course they would have to repay the outstanding loan of £100,000 to
the Estate of the deceased Settlor.
deceased’s estate would have to pay IHT at 40% on the value of the
loan repaid, i.e. £40,000.
However there would be no IHT liability on the £79,085
remaining in the Trust.
means, that after 10 years the £100,000 would have resulted in
£139,085 being available on the Settlor’s death, £79,085 in the
trust and the £60,000 repaid loan after the IHT liability has been
However, if the
loan trust has never been set up and the £100,000 and the growth on
it had all remained in the Estate the IHT liability would have been
£71,634 resulting in only £107,451 being available on the
the “Loan Arrangement” has resulted in an IHT saving of
£31,634. Thus it
effectively freezes the IHT liability as any growth on the loan is
not liable to IHT on the Settlor’s death, although it may be liable
to other taxes within the trust.
main advantage is that the Settlor has full access to any amount of
the loan that is outstanding.
This means that at any point the £100,000 loan can be called
in either as a one off repayment or in a number of instalments, but
these should not be regular.
main disadvantage is that the Settlor is giving away any growth on
Where Can I Get Further Help?