Inheritance Tax Loan Trust

Inheritance Tax Loan Trust solutions are a common method of mitigating tax.

How do they work?

You establish an Inheritance Tax loan trust. You then lend the Inheritance Tax loan trust money. The amount of capital you give the trustees is considered to be the loan. The loan’s value will remain inside your estate. All growth on the money however, will be outside the estate and if invested wisely, will be free of tax as it grows, and distributions can also be free of Inheritance Tax.

On demand you can ask for the loan to be repaid to you. You can also ask for a regular income stream from the Inheritance Tax loan trust. Whatever you take from the Inheritance Tax loan trust will then reduce the taxable element to your estate. If you had taken 20% of your original investment into the Inheritance Tax loan trust as income or withdrawals, this would reduce the loan by 20%.

Example: You establish an Inheritance Tax loan trust for £100,000. Over 6 years you have taken 5% per year withdrawals without any tax liability. The investment after growth for example is worth £110,000. The total amount in your estate however is £70,000 as the original capital placed into the trust was £100,000 less the withdrawals of £30,000 equals £70,000. The original capital invested has grown outside the estate for Inheritance Tax purposes.

Disadvantages:

  • When you exhaust your original capital your income stream will stop. You are only allowed access to the original capital you place into the trust
  • There will be a charge for setting up the Inheritance tax trust

Advantages:

  • All growth can be income tax and Inheritance tax free
  • Unlike the discounted gift trust, your original capital is still accessible to you
  • Similar to the discounted gift trust, if you were uncomfortable giving capital away immediately to family, this solution works, as they do not receive the money until you die. It therefore, controls how and when your children receive the money

A Gift and Loan Scheme (or Loan Scheme) is generally suitable for people who want to retain access to their original capital, but do not want their estate to increase in value any further.

Call one of our Inheritance Tax Planning advisers on 0800 0112825 or complete the enquiry form in confidence to see how we can assist you.

Click on the links below to discover more solutions to Inheritance Tax.

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Also visit our inheritance tax questions section where we cover a number of the detailed aspects of estate planning you should be considering.

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