About the Loan Trust
The Loan Trust offers your client an alternative to giving away capital for good – it allows access to capital but any growth won’t further increase the estate.
Your client sets up the trust by appointing trustees, of which your client is one, and making an interest-free loan to them of the capital they wish to invest. This loan is interest free and repayable on demand.
The Loan Trust won't normally create any immediate Inheritance Tax charge although any outstanding loan remains part of your client's estate for Inheritance Tax purposes.
The trustees invest the loan in one or more of the single premium investment bonds on offer. Any growth on the capital is held outside of your client’s estate.
Your client can demand the balance of the outstanding loan at any time they need it – either as a lump sum, occasional sum or regular payments. Repayments are funded by the trustees taking withdrawals from the bond. Each withdrawal is a partial repayment of the original loan.
Withdrawals can continue until the loan has been repaid to your client in full. Your client can receive up to 5% each year of the amount invested into the bond without creating an immediate Income Tax liability.
The loan can be waived in part or full at any time, which will create a Potentially Exempt Transfer (PET) or Chargeable Lifetime Transfer (CLT) for any amounts not exempt.
Features and benefits
How the Loan Trust works
Income Tax
How is a trustee held bond taxed?
The trustees can withdraw up to 5% of the original investment each year without any immediate tax liability.
On surrender or part surrender of the bond a chargeable gain arises which could trigger an Income Tax liability. Where a UK bond is used the gain is accompanied with a tax credit which satisfies the basic rate tax liability.
Who pays the Income Tax?
This depends on which type of trust your client has chosen.
Absolute Trust
The gain is treated as income of the beneficiaries and taxed at their highest marginal rate. Where a UK bond is used the gain is accompanied with a tax credit which satisfies the basic rate tax liability.
Discretionary Trust
If the settlors are alive and resident in the UK when an Income Tax liability arises, or it occurs in the tax year in which they die, the gain is treated as income of the settlors and taxed at their highest marginal rate. The settlors may recover the tax from the trustees.
If an Income Tax liability arises after their death (other than in the tax year in which they die), or when they're not resident in the UK, the tax charge will be assessed against UK resident trustees at the additional rate of tax for individuals.
In either case, where a UK bond is used the gain is accompanied with a tax credit which satisfies the basic rate tax liability.
Choice of products
Trustees can choose at least one of the following three products.
Adviser charging
Prudential can facilitate both set-up and ongoing adviser charges.
More information on charges can be found in the client guide to trusts.
Important information
The impact of taxation (and any tax reliefs) depends on your client’s individual circumstances.
The information is based on our understanding, of current taxation, legislation and HM Revenue & Customs practice, all of which are liable to change without notice.
