Many settlors of loan trusts find that further down the line they don’t actually need full access to the outstanding loan. They can take withdrawals and give those funds away, but there is another option which does not involve disinvesting from the bond. Bearing in mind that the trust fund is subject to the settlor’s right to repayment of the loan then this option is to waive the loan (in full or part) so that the waived amount then increases the trust fund held for the beneficiaries of the absolute or discretionary trust.
In order to execute a loan waiver, the settlor should complete a deed and the amount of the loan waived will be classed as a gift. The insurance company should be able to provide a deed.
If the waiver amount is not covered by an exemption, it will either be a potentially exempt transfer (PET) or a chargeable lifetime transfer (CLT) depending on whether the trust has been set up on an absolute or discretionary basis.
Lifetime waivers within the annual exemption
- If a PET or CLT is going to cause repercussions for the settlor’s other IHT planning e.g. exceeding their nil rate band for CLTs, or potentially invoking the 14 year rule with an unwanted PET, then using the annual exemption can be useful.
- Waiving £3,000 of the loan will save £1,200 in IHT immediately (or for a joint settlor trust £2,400). Remember also that any part of the annual exemption which is not used in a tax year is carried forward into the following tax year. Loan waivers can be a simple means of utilising the annual exemption.