20th July 2018

Prudential: Loan Trusts for Inheritance Tax Planning

A loan trust is a way of setting up a trust for Inheritance Tax (IHT) planning whilst allowing the settlor (the individual who sets up the test) access to the original capital. Helen O’Hagan, Technical Manager at Prudential explores further. 

What is a loan trust?

This trust is set up by the settlor who lends monies to the trustees who then invest these monies normally into a life assurance bond. Most companies offer these on either an Absolute or a Discretionary trust basis. Loan trusts can be set up on a single or joint basis.

You may find these suitable for clients who want to do IHT planning but are not ready to give up access to their capital at this point in their lives.

Flexibility

The outstanding loan is available to the settlor at any time, it is interest free and repayable on demand. Don’t forget that if the trust fund comprises a bond, the settlor can take the loan repayments in the form of the 5% tax deferred withdrawals if a regular payment stream is required. Alternatively, the settlor can take lump sums out at any point when required or leave the asset intact until some future date.

What about IHT?

The structure of a loan trust is such that the client is not making a transfer of value when it is set up. Remember it is a loan and not a gift that is the initial transaction with the trustees. All the growth on the investment is outside of the client’s estate from day one!

Read the full article here. 

Tax, Trust & ISA