Inheritance tax planning is a fundamental part of wealth management and, with sophisticated planning, we can ensure opportunities are not missed.
There are a number of ways in which you can look to reduce the Inheritance Tax (IHT) liability on your estate. These typically involve giving away assets either directly to an individual or via a Trust, or investing in investment schemes which benefit from IHT reliefs (such as *business relief qualifying investments).
The downside of these options is that you either lose control or the right to benefit from the asset, or take significant investment risk with the investment. Furthermore, giving assets away while continuing to ‘benefit’ from them is ineffective for planning due to what is referred to as ‘the gift with reservation’ rules.
What is a Loan Trust?
A Loan Trust enables you to undertake IHT planning without the need to give capital away or to take higher levels of investment risk. A Loan Trust is not caught by the gift with reservation rules and is not a transfer of value for IHT purposes.
With a Loan Trust, money is loaned rather than gifted into the Trust, which is then invested (typically within an investment bond), for the benefit of the Trust beneficiaries. If you are unfamiliar with how Trusts work, see our UK Trusts Guide.
The Settlor of the Trust, or the person who makes the loan into the Trust, retains control and ownership of the loan at all times but is not allowed to access the growth produced. On the other hand, the beneficiaries of the Trust are able to access the growth produced by the investment of the loan but not the loan itself. This is demonstrated as follows.
Types of Loan Trust
The Loan Trust can either be set up as an Absolute Trust (the beneficiaries have an absolute right to the growth of the fund and can demand access once they reach adulthood) or a Discretionary Trust (the Trustees decide who will benefit from the Trust fund and when).
Loan repayment
The Settlor of the Trust can request that some or all of the loan is repaid at any time and in any manner. However, care needs to be taken if the Loan Trust is held within an investment bond as there may be tax consequences associated with taking a withdrawal which is in excess of the available 5% tax deferred withdrawal allowance.
You are only able to access the amount loaned into the Trust, and no withdrawals are permitted by you once this loan has been fully repaid. It is important to note that the loan remains inside your estate at all times, although loan repayments which are used to supplement income may also help reduce your IHT liability.
If you decide that you no longer need access to the amount loaned into the Trust, you can choose to waive the right of repayment (partially or in full) or pass the right to the loan to another person. Any loan formally waived will be treated as a gift for IHT purposes. If you survive seven years from the date of the waiver, the amount waived will be outside your estate, subject to any available exemption. Appropriate legal advice should be taken to ensure any waiver is effective..
Partial loan repayments should be spent for the structure to be most effective for IHT planning. The availability of the normal expenditure out of income exemption on gifts made from loan repayments is a complex area and specialist advice should be sought.
In addition, the loan is interest-free, repayable on demand, so partial loan repayments can be switched off in the earlier years while the underlying funds grow. When the loan has been repaid in full, the Settlor can have no further benefit from the Trust fund in order to avoid ‘gift with reservation’ issues.
IHT advantanges
Any growth on the loan is immediately outside your estate for IHT purposes, which can help ‘cap’ the value of assets held inside your estate (avoid making the IHT liability worse), although a number of years is required in order to fully benefit from this.
If you would like to discuss how Loan Trusts could benefit you, then please speak with your financial adviser or contact one of our Financial Planning Consultants who will be delighted to discuss this further with you.
Please note the information contained is correct as at the date of this article.
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Disclaimer *Don't invest unless you're prepared to lose all the money you invest. This is a high-risk investment, and you are unlikely to be protected if something goes wrong The information set out in this article is for information purposes only and does not constitute advice to undertake a particular transaction. It is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Past performance is not a guide to future performance, nor a reliable indicator of future results or performance. The value of investments, and the income or capital entitlement which may derive from them, if any, may go down as well as up and is not guaranteed; therefore investors may not get back the amount originally invested. The Financial Conduct Authority does not regulate Trusts, Tax or Estate Planning. Appropriate professional advice should be taken on specific issues before any course of action is pursued. Any advice provided by a Crowe Consultant will follow only after consideration of all aspects of our internal advice guidance. |
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DisclaimerCrowe Financial Planning UK Limited is authorised and regulated by the Financial Conduct Authority (FCA) to provide independent financial advice (FRN 185323). This insight is approved for use by Crowe Financial Planning UK Limited on the date issued. The information on this page is for information purposes only, based on our understanding of legislation and market practice at the time of writing. It does not constitute financial, legal or tax advice, and appropriate professional advice should be sought before any course of action is pursued. Where professional financial advice is sought, fees will apply and will vary depending on the complexity of the individual case. Any advice will be based on personal circumstances, and as with all financial planning, outcomes will depend on a range of factors that cannot always be predicted or guaranteed. The value of investments can go down as well as up and is not guaranteed; investors may not get back the amount originally invested. Past performance is not a guide to future performance. Tax treatment depends on individual circumstances and is subject to change. The FCA does not regulate Trusts, Tax or Estate Planning. The division of pension assets on divorce involves both financial and legal considerations, independent legal advice should be sought alongside any financial planning guidance. Please be aware that clicking links to third-party websites will take you away from the Crowe Financial Planning website. We are not responsible for the accuracy of information contained within linked sites. |
