Loan Trusts Unlocked: A flexible IHT strategy for clients needing access to capital Q&A

What are the product costs involved in setting up a Loan trust like this?    

Generally, the “off the shelf” trusts offered by providers are free of charge but there will be costs associated with the investment i.e. the bond . Product costs will vary between providers so you should always discuss it with the relevant provider. 

What is max age to commence the loan trust?         

There is no legal maximum age, but practical considerations (such as life expectancy and investment horizon) apply. There could be a maximum age on the product used i.e. a bond, however it is the trustees who are the applicants for the bond so their age should be considered.

Can a power of attorney set up a loan trust for someone?  

In England, Wales and Northern Ireland, a power of attorney must seek approval from the Court of Protection (COP) to make gifts of the donor’s property and this includes an interest-free loan of the donor’s property. Therefore the attorney would require COP approval to set up a Loan Trust on behalf of the donor.

In Scotland, the Granter (donor) can include gifting powers when setting up their Lasting Power of Attorney (LPA). If the power doesn’t exist in the LPA instrument, then the attorney will need to seek approval from the COP to establish a Loan Trust on behalf of the Granter.

Does it have to be registered with TRS at outset?     

Yes, most trusts (including loan trusts) must be registered with the Trust Registration Service (TRS) unless they qualify for an exemption.

Should we use a solicitor to set up the trust, deeds etc rather than using a provider one? Where does the liability fall for the trusts?  

Bond providers offer a range of free draft generic trust deeds which might be suitable to meet different client needs. The trust terms and provisions cannot be altered. Therefore if a client has more bespoke requirements it’s likely they’ll need a bespoke trust deed drafted by a solicitor. 

Financial advisers who are competent in trust planning may recommend the use of a bond provider’s trust without involving a solicitor and the financial adviser will be liable for the suitability of their recommendation. If the adviser and/or client have any concerns about the legal structure of the bond providers trust deed, then legal counsel should be sought before using the trust.

Widow/widower can be beneficiary of discretionary loan trust?    

Yes, in generic terms it is possible to include the settlors widow/widower as a potential beneficiary in the discretionary class (applicable on a single settlor basis only) . This is the case with all of the discretionary trusts in Prudential’s range. It may differ on other bond providers draft discretionary trust provisions.

Is nominal gift before loan required for the gifting process to work? Or is this now redundant?

You do not need to make a nominal gift before the loan for the process to work.

If an initial adviser fee was deducted from the investment, can you please re-clarify – is this deemed a loan repayment?           

An advice fee is paid separately from the trust and investment and so is not a loan repayment. It sounds like you are referring to an initial advice charge which is taken from the provider before investing the money and paid to the adviser. This would be classed as a loan repayment.

Should the Trust be set up at the same time as the Bond or should one happen before the other?

The bond cannot be set up before the loan has been made to the trustees so the application should be dated on or after the date the trust deed has been signed.

Please can you explain if 2 single settlor trusts would work for a husband and wife?

Yes, two single settlor trusts could be used for a married couple. Where a discretionary trust is used, this option is often simpler than using a joint settlor trust as it avoids chargeable event gain issues where one settlor has died in a previous tax year and their share of the gain is potentially assessed the trustees at trustee rate.

Then would the surviving spouse be able to access the growth of the deceased's trust without any issues?            

Yes, if the surviving spouse is a beneficiary, they can access the growth in the deceased’s trust. There are no gift with reservation issues because the settlor has died and cannot benefit.

If husband and wife set up individual loan trusts they could access each other's growth and spousal exemption apply?             

The spousal exemption wouldn’t come into it. While the settlor’s spouse is usually a potential beneficiary on a discretionary trust, it is not a good idea for trustees to make distributions to them during the settlor’s lifetime. This could cause gift with reservation issues if the settlor were to end up benefitting either directly or indirectly from the distribution. Once the settlor has died, the gift with reservation issues no longer apply.

If a discretionary trust includes spouse as beneficiary, can this be treated as "gifts with reservation of benefit"?           

Our understanding is that the settlor’s spouse simply being a potential beneficiary of the trust does not in itself cause a gift with reservation. If however money was distributed to the settlor’s spouse during the settlor’s lifetime and the settlor benefitted from the money in any way, a gift with reservation could arise.

If client knows they'll never need access to the loan can the loan be waived immediately after the plan starts to start the 7 year clock, or is there a better way?

If you know you’ll never need access, a gift trust is more IHT-efficient. Waiving the loan immediately starts the 7-year clock, but a gift trust is simpler.

I missed the bit where you dealt with the entry charge into the Loan trust. Can you expand this a little?   

You only have an entry charge where the cumulative value of chargeable lifetime transfers over a rolling seven year period exceed the settlor’s nil rate band. There is no entry charge when setting up a loan trust because there is no transfer of value i.e. there is no potentially exempt transfer or chargeable lifetime transfer.

If I set up a loan trust over the nil rate band, and few days later waive the loan, do I avoid the entry charges?          

No. If part of the loan is waived it will be a gift for IHT purposes. If it’s a discretionary loan trust then the gift will be a chargeable lifetime transfer (CLT) so if the value of the amount waived combined with CLTs in the previous seven years exceeds the settlor’s nil rate band it will cause an entry charge on the excess. 

Do you see many instances of strategically 'forgiving' portions of a loan in a loan trust (i.e. by using yearly gifting allowances)?             

Yes, this is a common and IHT efficient strategy, particularly if the annual exemption is not being used elsewhere. It’s effectively a paper exercise. The settlor executes a deed to waive £3k of their loan and the trustees adjusted their outstanding loan records accordingly.

This exercise also helps advisers demonstrate value for ongoing advice as using the annual exemption creates an immediate IHT saving of £1,200 or £2,400 if it’s a joint settlor arrangement and £6k is being waived.

Is it ever possible to close the trust completely and access all the growth/loan if the trustees all agree?             

No, the settlor can only access the loan. The growth belongs to the trust beneficiaries and cannot be returned to the settlor. Section 6353 of HMRCs Trust, Settlements and Estates Manual confirms:

A settlor can revoke a trust, if the original trust document allows this action. The trust is fully valid. It only comes to an end when the settlor fully revokes it.

If the settlor has no power to revoke the trust they must get court approval to cancel the trust. They must satisfy the court that they made the trust as a result of:

·       fraud, or

·       undue influence, or

·       mistake.

Prudential’s Loan Trust does not provide the Settlor with the power to revoke the trust and that is likely to be the case with Loan Trust arrangements provided by bond providers. It is therefore essential that the Settlor understands and accepts what access (if any) they are entitled to under a trust arrangement, whether it’s a Loan Trust, Discounted Gift Trust, Flexible Reversionary Trust or Gift Trust.

Please can you cover getting the money back out of a loan trust. How to get capital out whilst retaining growth in the trust in later years? Tax consequences?

To repay the loan (or make distributions of the trust fund to beneficiaries) the trustees need to take a withdrawal from the bond. Normal bond withdrawal methods and chargeable event rules apply. You should find our article in Professional Paraplanner earlier this year helpful for this question.

If a client demands his original investment back as a lump sum or income is this taxed in any way?       

Normal bond withdrawal methods and chargeable event rules apply.

What's the tax situation if the trustees repay too much of the loan? For example, if settlor set up regular repayments of loan, but forgets to turn off this regular income stream after 20 years (assuming 5% withdrawals) what happens?

This would be a payment of the trust fund to the settlor which is a breach of trust. HMRC may treat the excess as a benefit to the settlor and treat the trust is invalid for IHT purposes, resulting in the entire trust fund being included in the settlors estate. If it’s a genuine error and corrected quickly, HMRC may agree to the trust retaining the tax status as originally intended.

If the settlor waives the loan, will this become a CLT, and may trigger a 20% entry charge if the value exceeds the nil-rate band?

Yes. If the settlor waives the loan, it is a gift. Any amount of the gift not covered by the annual exemption will be a transfer of value for IHT purposes. Therefore a PET if it’s a bare loan trust or a CLT it it’s a discretionary trust. If the CLT exceeds the available nil-rate band, a 20% entry charge applies.

The gift element can only be used on the top-up, or can be from the outset?             

If the trust is established with a loan only at outset, the settlor could immediately waive part of the loan.

In the case of the settlor adding money to an existing loan trust, it could be an additional loan agreement or it could be a gift to the trust fund depending on the circumstances. If it’s a further loan then the settlor would need to execute an additional loan agreement first (we have a form to achieve this for the Prudential Loan Trust). If it’s a gift to the trust fund, the settlor should confirm the gift in writing to the trustees. In either case, the trustees have the option of investing the addition by topping up the existing bond or setting up a new bond.

Can you assign segments of the bond to a beneficiary and so they pay income tax on any gain at their personal tax rates if the UK settlor is still alive?    

The trustees can assign segments of the bond to make a distribution in respect of the trust fund only. Post-assignment, the beneficiary will be liable for any gain at their marginal rate on any subsequent chargeable events realised on the segments assigned to them. Whether the settlor is alive or not wouldn’t be relevant.

If an advice charge reduces a loan but a fee doesn't, would an ongoing advice fee not count towards 5% withdrawals?     

The initial advice charge (IAC) is normally for advice given to the settlor to set up the trust and if this is the case, it should be treated an immediate loan repayment. For example, if the loan is £100k and the IAC is £3k, the trustees should reduce the outstanding loan amount to £97k on their records once the bond has been set up. The premium for the bond would be £97k which is what the 5% tax deferred allowance (TDA) is based on.

The ongoing advice charge (OAC) is an agreement between the trustees and the adviser (not the settlor with “individual” hat on so to speak). The OAC doesn’t reduce the settlors loan amount but it does count as a withdrawal from the bond and therefore does use the 5% TDA.

Is it possible for the settlor to assign to a beneficiary and at a later stage the beneficiary reassign segments back to the settlor if circumstances change?         

In theory, but this could be seen as tax avoidance. If HMRC suspects pre-arrangement, they may challenge it.

Am I right if client takes regular income as part of 5% consideration and spend it, it will reduce the capital loaned to the Trust?

Yes, regular withdrawals up to 5% per annum are treated as loan repayments and reduce the outstanding loan.

If a 60 year old used a loan trust via an investment bond and used the 5% withdrawal, would the loan be repaid at age 80?      

Yes, if 5% is withdrawn each year, the loan would be repaid after 20 years (assuming the investment returns supported total repayment)

Would you mind talking through steps where settlor / lender wishes to wind up the loan trust during their lifetime and distribute assets to the beneficiaries…

The settlor can request repayment of the loan. Once repaid, the remaining trust fund (growth) can be distributed to beneficiaries. Alternatively, they could waive the loan and then the trustees distribute the total trust fund.

If the client wants the loan repaid in full in year 5, how would this work in terms of surrendering the bond to repay the loan? How is the growth segregated?   

There is no “segregation” of the growth and the outstanding loan when it comes to calculating chargeable event gains on encashing part of the bond. The trustees would surrender enough of the bond to repay the loan and the chargeable gain would be calculated in the same way as it would be for a bond not held in trust.

Please can you cover getting the money back out of a loan trust. How to get capital out whilst retaining growth in the trust in later years? Tax consequences?    

The settlor can request the loan is repaid at any time. If the loan is repaid what remains is held by the trustees for the beneficiaries. If a discretionary trust is used then payments to beneficiaries are at the trustees discretion so the funds could be retained within the trust. If its an absolute trust the trustees would just distribute the growth if the beneficiaries had attained age 18.

The tax implications of repaying the loan in full will depend on what gain is triggered on encashing enough to repay the loan and the tax position of the person(s) being assessed on the gain.

If the settlor takes the same amount of income as the growth in the Bond per annum, who decides what's the value of the loan if the settlor dies after 5 years?      

The outstanding loan is the original loan minus repayments. Growth remains in the trust. The value of the loan at death is what is left to be repaid to the settlor’s estate.

Can you use the £3k allowance to gift automatically each year or is this to be done manually?

In order to waive part of the loan it needs to be done by deed. Our understanding is that you would need to manually complete a deed each time you wanted to write off part of the loan.

Isn't one of the uses of a Loan Trust to invest in an Investment Bond, and get a 5% withdrawal pa tax free for 20 years, until all the loan is repaid, tax free?          

Yes, you can use the 5% tax-deferred withdrawal allowance to repay the loan over 20 years. Withdrawals within the tax deferred allowance are “tax deferred “ rather than “tax free”. Withdrawals will be taken into account when calculating the gain on full surrender of segments.

Could you please explain the IHT position on the waived loan on death?

Regardless of whether the loan is waived on death or not, the outstanding loan will form part of the settlor’s estate for IHT purposes. Waiving the loan on death is more to do with simplifying administration as there is no need to wait for probate to access the money and it can make it simpler to manage chargeable events on a discretionary trust.  

Can the trust make loans to beneficiaries instead of assigning; thus, adding to their estate?

Yes, the trust can make loans to beneficiaries, but a proper loan agreement should be in place.

Would it make more sense to assign segments from a loan trust if the settlor is a higher rate taxpayer, taking money back?    

If you are asking about distributing to a beneficiary from a discretionary trust then it would make sense to assign segments to a beneficiary prior to encashment if they would suffer less or no tax than the settlor. An assignment of segments to make a loan repayment would cause a chargeable event anyway so the settlor would be assessed. If it was an absolute trust then as long as the parental settlement rules didn’t apply then the absolute beneficiary or beneficiaries would be assessed on any gains within the trust.

What is process of paying to beneficiaries, thinking bank accounts and how money gets from trust to beneficiary avoiding settlor?     

Depending on the provider’s processes, payments may be able to be made directly to beneficiaries although it more common that payment is made to the trustees who will distribute the funds. The settlor should not benefit from these payments to avoid tax complications. Proper records should be kept.

Are gifts from loan trust to beneficiary, and assignments out of loan trust to beneficiary always subject to the 7 year rule?          

The 7 year rule does not apply when the initial loan is made to the trustees as there is no transfer of value. When the trustees invest the loan the growth achieve creates the trust fund. Distribution of the trust fund to a beneficiary, regardless of whether the trustees make the distribution by taking a withdrawal from the bond or assign segments to the beneficiary, does not trigger a transfer of value by the settlor. As such, there’s no 7 year rule for distributing the trust fund.

However, if the settlor was to waive part or all of their loan prior to the distribution of trust funds to a beneficiary then the settlor would be making a transfer of value of the amount waived not covered by their annual exemption.

Example:

Original loan on single settlor trust is £100k and in year three the bond is worth £115k. No loan repayments have been made so the trust fund is £15k. The settlor wants the trustees to distribute £20k to a trust beneficiary.

The trust fund isn’t sufficient to make a distribution of £20k so to do this the settlor would need to waive £5k of the loan first. This would need to be done by deed (we have a draft deed to achieve this action for our Loan Trust). Once executed the trustees would reduce the outstanding loan to £95k on their loan records. The trust fund then increases to £20k.

In this scenario the settlor would be deemed to have made a transfer of value of £5k, which would equate to a £5k PET or CLT if it’s a bare or discretionary loan trust respectively if they were not making use of their annual exemption. The 7 year clock would apply to the £5k PET or CLT, not the subsequent distribution of £20k to the beneficiary. If the settlor had their full annual exemption available and applied this to the gift, the PET or CLT would be reduced to £2k.

Using the same example, but on a joint settlor basis, each settlor would be making a £2.5k PET or CLT if the annual exemption was not available. But if each settlor had their full annual exemption available their £2.5k gift would be exempt so no PET or CLT (and therefore no 7 year rule).

Can the bond wrapper / investment portfolio be changed to a different provider in the future?

Usually, most trusts have wide investment powers allowing the trustees to change the underlying investment. Tax implications of surrendering the existing investment need to be considered.

Can you use a home into a loan trust?

The Prudential Loan Trust can only be established with a cash loan. We don’t think it’s possible to “lend” a house or any other type of asset. Legal advice should be sought if you are considering trying to use a trust with any property.

GIA or Bond for a Loan Trust?

Prudential’s Loan Trust can only be established using a bond. However, the trust provisions do provide wide investment powers so it would be possible to change the underlying investment at a later point in time, if deemed appropriate.

Bonds are generally preferred for trusts due to simpler administration and tax reporting. GIAs can be used but are more complex, especially for discretionary trusts, and may not be as tax-efficient.

Why can't the Settlor and Trustees not use an OFFSHORE Bond as opposed to an onshore Bond?            

You can use either an onshore or offshore bond in a loan trust. The choice is based on tax planning and investment needs, not a restriction of the trust.

Can you ever apply an existing investment bond into a loan trust?

An existing bond cannot be used to set up a loan trust with Prudential (not sure if any provider allows this). It’s a moot point anyway as an assignment of a bond in place of a loan would be an assignment for money or money’s worth and would therefore trigger an immediate chargeable event. Encashing the bond and starting with a clean slate would be more appropriate.  An existing bond could however be gifted into an existing Loan Trust.

Can you use Business Relief with a loan trust?         

Prudential’s loan trust must be initiated with a bond however the trustees do have wide investment powers so could in theory invest in qualifying business relief investments if they thought that was appropriate. Given the risks associated with some business relief schemes they may not want to use these as a trustee investment. If for example, there were liquidity issues the trustees would not be in a position to repay the outstanding loan to the settlor on demand. 

Can an existing Prudential International Portfolio Bond be moved into a Loan Trust and if so what are the implications to be aware of?             

An existing bond cannot be used to set up a loan trust with Prudential (not sure if any provider allows this). It’s a moot point anyway as an assignment of a bond in place of a loan would be an assignment for money or money’s worth and would therefore trigger an immediate chargeable event. Encashing the bond and starting with a clean slate would be more appropriate.

I tried to change an existing Bond Provider within a Loan Trust to Prudential and was told it was not possible, yet you said it was able to be done       

Most trusts have wide investment powers, so changing provider is usually possible. However, some providers may have restrictions. Check the specific trust deed and provider terms.

Can you use an ISA in a loan trust?   

No, ISAs cannot be held in trust.

Will Prudential update their Onshore Bond to include Multiple lives assured, 10+ funds in the bond portfolio and greater OEIC fund choice?            

This isn’t one for our technical team to comment on. You might want liaise with your account manager to keep up to date with product developments.

Can the bond continue after death?

Yes, if there are multiple lives assured, the bond can continue after the settlor’s death. If the settlor is the sole life assured, the bond will end on their death.

Can Onshore Bonds offer Capital Redemption?       

No, onshore bonds cannot offer capital redemption due to UK life assurance company tax rules.

What would happen if the funds are invested in an onshore bond and the lives assured passed away prior to the settlor, would the bond have to be encashed?  

If all lives assured die, the bond ends triggering a chargeable event. The proceeds would be paid out to the trustees but could be reinvested and remain in the trust for the beneficiaries.

I assume if the settlor takes more than the 5%, there could be a chargeable event/gain on the settlor? So, this could limit how much can be paid back?      

If the trustees take a withdrawal across segments in excess of the 5% allowance, it will trigger an excess gain. Who’s liable for the gain depends on whether it’s a bare or discretionary trust.

If it’s a bare loan trust the gain will be assessed against the beneficiary. If it’s a discretionary loan trust, the gain will be assessed against the settlor assuming they are UK resident. If it’s a joint settlor discretionary trust, but one of the settlors died in a previous tax year, then 50% of the gain will be assessed against the UK resident settlor still alive with the other 50% against the trustees at the trust rate of 45% (effectively 25% if it’s an onshore bond due to the 20% basic rate credit). If the settlor of a discretionary trust incurs tax as a result of the gain, they have a statutory right to recover the tax from the trustees. This means the trustees would need to take a further withdrawal from the bond to repay the settlor, which might also have chargeable event gain implications.

If tax is due it doesn’t reduce the settlors outstanding loan amount. However, if trustees need to take money out the bond to repay the tax incurred by the settlor or pay the tax due if the trust rate applies as one of the settlors died in a previous tax year, it will reduce the bond value. This is more likely to reduce the value of the trust fund for the trust beneficiaries, rather than impacting the trustees ability to repay the outstanding loan to the settlor but ultimately this will depend on the investment performance.

Larger earlier withdrawals – would this trigger a chargeable event? Say £200k invested but in year 3 client wants £100k – how does this work?

If the investment premium was £200k, assuming no other withdrawals (including ongoing advisers charges as they are essentially a withdrawal by the client to pay the fee), then the tax deferred allowance in policy year three would be £30k. A withdrawal of £100k across segments would therefore create an excess chargeable event gain of £70k. This is likely to be an artificially high gain in comparison to the economic performance of the bond at that point in time. A surrender of individual segments and a partial across the remaining segments is likely to achieve the desired withdrawal amount but with a lower gain.

You should find the following Partial vs Full surrender article on our Tech Matters website helpful.

Can you show what the gain would be if they don’t withdraw any of the loan?         

If no withdrawals are made, the gain is simply the growth of the bond within the trust. The settlor’s estate will still include the outstanding loan, but all growth remains outside the estate for IHT.

Does tax liability fall on parents for U18 gains over £100 from their Loan Trust?     

Parental settlement rules apply to all income from trusts set up by parents for minor children where they exceed £100 in a tax year. The rule also applies to bond gains.

And is it different if set up by grandparents?

Yes, if grandparents set up the trust, the parental settlement rules do not apply. Gains are taxed on the child.

Does time apportionment relief reduce a gain when the bond owner has been non-resident at some point during the investment period?             

Yes, time apportionment relief may apply to reduce the gain if the bondholder was non-UK resident during the investment period. When it comes to trusts the position can be complex and specialist advice should be sought.

In what way do the parental settlement rules apply when the bond isn't income producing?

Parental settlement rules apply to all income from trusts set up by parents for minor children where they exceed £100 in a tax year. The rule also applies to bond gains.

While chargeable gains are assessed on the settlor, can it be paid by the trust?         

With a discretionary trust, if the settlor is alive and UK resident in the tax year the gain arises, the settlor is assessed on the gain. If they have tax to pay they reclaim this from the trust otherwise they are making a gift for IHT purposes but it is the responsibility of the settlor to actually pay the tax to HMRC. 

Why can beneficiaries not reclaim trust tax with a bond gain but can with other solutions. Does this apply both onshore / offshore?      

Although bond gains are subject to income tax, they are not always treated the same as income from other investments. When a bond gain is taxed at the trust rate, beneficiaries cannot reclaim the tax. This applies to both onshore and offshore bonds. Assigning segments to beneficiaries before encashment can avoid this issue.

What is the process for the settlor reclaiming tax paid on a chargeable event from the trustees? Would this incur further tax?

The settlor should inform the trustees of the tax paid and have this reimbursed to them. If the only asset held by the trustees was a bond then they would need to withdraw enough from the bond to generate enough to pay to the settlor. This could in turn generate a further tax liability but it depends on the facts of the case.

If a client has an Offshore Bond and Trust (i.e. not UK resident), if the settlor dies, does the taxation fall on the beneficiaries, without the need to assign?            

Tax rules are complex and the taxation of a non UK resident trust will depend on the type of trust and jurisdictions involved.  

If the trust is discretionary, does 10-year periodic charges apply to the growth in the trust?

Yes, the value of the trust in excess of the outstanding loan is tested against the trust’s nil rate band at each ten year anniversary to see if a periodic charge applies.

The original loan is not included in the calculation. Is this correct?             

That is correct however if the full value of the trust (including the loan) exceeds 80% of the trust’s nil rate band the trustees need to report to HMRC regardless of whether a tax charge applies or not.

In theory, can you set up an infinite number of loan trusts to benefit from a full £325,000 nil rate band for periodic charge/exit charge purposes?       

You could however you would need to consider the additional administration of setting up an infinite number of trusts. Each trust would need to be registered on HMRC’s Trust Register. Product terms may also mean that the charges applicable to the infinite number of bonds may be higher than if one trust was used. This could reduce the IHT saving made by using multiple trusts.

For the purpose of the periodic charge, if the settlor has established other Disc. Trusts which exceed £325k, does the loan trust still have its own NRB?  

The loan trust’s NRB will be reduced by any chargeable lifetime transfers made in the seven years before the loan trust was set up. If the other discretionary trusts were gifts and resulted in CLTs which were in the seven years before the set up of the loan trust then these would reduce the NRB available for the loan trust.

If you have two settlors are two NRBs available for periodic charge?             

Yes, if there are two settlors, the trust will have a nil rate band from each settlor for periodic charge calculations. Each settlor’s gifting history should be considered as any chargeable lifetime transfers in the 7 years before the trust was set up would reduce the nil rate band available.

Is the Rysaffe principle impacted if the box is ticked to waive the loan on death?             

Two settlements are only classed as “related settlements” if they commence on the same day or are added to on the same day. Waiving the loan on death to more than one trust would result in them becoming related settlements and would undermine the IHT benefit of the Rysaffe planning.

If a loan trust was set up on a joint basis, would the trust NRB be £650k instead?            

Yes, if both settlors are involved, each can use their own nil rate band, so the trust could benefit from (up to) a combined £650,000 nil rate band for periodic charge calculations.

Do you need to fill in a form every 10 years even if growth in the trust does not exceed the NRB?     

If the full value of the trust (including the loan) exceeds 80% of the trust’s nil rate band the trustees need to report to HMRC regardless of whether a tax charge applies or not.

Can you please explain the ordering of gifting/loaning into trust in more detail?   

The recommended order is: 1) Loan trust first, 2) Chargeable lifetime transfer (CLT) trust second, 3) PET last. This maximizes the nil rate band for each trust. Our “Gifting and Inheritance Tax” covers this in more detail.

Can the trust not benefit from an inherited NRB?    

No, the trust will only benefit from the settlor’s own nil rate band.

In Rysaffe Planning, if more trusts are used, do you need to set up multiple bond products or can you use just one bond?       

Yes, you would need to use multiple bonds. Product terms should be checked as this may mean that the charges applicable to the multiple bonds may be higher than if one trust was used. This could reduce the IHT saving made by using multiple trusts.

Hi, can you please explain in a bit more detail why you would do a CLT before a PET?       

If you do a PET first and it fails (i.e., settlor dies within 7 years), it becomes a chargeable transfer and uses up the nil rate band for subsequent discretionary trusts. Doing the CLT first preserves the nil rate band for the trust in the event the PET fails. Our “Gifting and Inheritance Tax” article gives more detail on the interaction between PETs and CLTs including the order of gifting rules.

I suppose if the loan is waived, this should be done after the 10 year periodic assessment?

If the settlor wishes to waive part of the loan shortly before the ten year anniversary, delaying until after the anniversary would make the periodic charge simpler. However delaying the gift means the 7 year clock for the gift to fall out of the settlor’s IHT calculation will start later potentially resulting in more IHT to pay on the estate. 

Revert to Settlor trusts ("Carve out") using NRB (CLT) should be used before Loan Trust?

It depends on access needs and the IHT strategy. If you want the capital out of your estate after 7 years and are comfortable with the access restrictions, a reversionary trust might be more suitable. If you want more flexibility on access to capital and are not looking to make a PET or CLT then a Loan Trust will be more suitable. A combination of both types of trust could be appropriate in some circumstances and if using both on a discretionary basis, set up the loan trust first to maximize the nil rate band for periodic charges.

Is a lifestyle trust ("Carve-Out" trust) a better alternative since it's outside the estate after 7 years and allow access annually?           

See answer to the previous question.

How can a loan trust be used as opposed to making outright gifts? How could it be more beneficial in relation to succession planning?             

Loan trusts are useful if you want to retain access to capital (the loan) while removing growth from your estate. Outright gifts are more IHT-efficient but mean giving up access. Loan trusts allow phased gifting and flexibility for succession planning.

How does Loan trust compare to gift & loan trust?  

They are essentially the same, except the modern loan trust does not require a nominal gift at outset.

Why is a trust necessary at all? If the donor makes a loan with a simple loan agreement (no interest, repayable etc) wouldn't it be just as IHT efficient?  

A trust provides control over how the growth is distributed and keeps the growth outside the estate for IHT. A simple loan to a beneficiary works, but you lose control over the asset and its future use.

How could a loan trust help post 2027 if someone holds most their wealth in a pension?

If pension rules change as proposed then it could lead to more people spending their pension funds to avoid them being subject to IHT and income tax on death post age 75. The knock on effect of this is that non-pension assets which previously might have been spent, growing at a faster rate. A loan trust can help cap estate growth and provide flexible access to capital, with growth outside the estate for IHT.

Will Prudential offer a Flexible Reversionary Trust?

This isn’t one for our technical team to comment on. You might want liaise with your account manager to keep up to date with product developments.

How does a loan trust compare to a family investment company, and when is each the more suitable solution?          

This is too wide a question to answer here and will depend on a client’s circumstances and objectives. In the meantime, you should find our FIC vs Trusts article helpful.

Does a lower client ATR score appeal more to loan trusts or business relief?           

Business relief investments are high risk, so a lower attitude to risk (ATR) is more suited to loan trusts, which allow for more conservative investment choices.  Remember with trustee investments the trustees personal ATR is not relevant – they must invest suitably for the trusts objectives without taking undue risk.

Can you do a deed of variation even if probate has completed and IHT tax return settled?

Yes, a deed of variation can be done within two years of death, even if probate and IHT returns are completed. Depending on the circumstances a variation could give rise to a further IHT liability.

How do loan trusts work in terms of being assessed for care fees by local authorities? Is growth free from being part of their assessment?

The outstanding loan will be included in the financial assessment of capital. The trust fund (growth in excess of the outstanding loan) is not an asset of the settlor and should not be taken into account in the financial assessment. However, keep in mind the deprivation of asset rules. If the local authority suspect and can prove deliberate deprivation of assets, the trust fund value could be taken into account.

I have a client with a loan trust. When trust was set up, the previous used the settlor as a beneficiary. Could you please advise who will owe the tax on death?             

In order for a trust to be effective for IHT, the settlor should be excluded from benefitting from the trust fund to avoid gift with reservation issues. It would be worth seeking legal advice on this particular case.

Is this session available on catch up i.e. to watch again after the event?

Yes, the session recording and slides are available on the Tech Matters website and via the events team.

Do you have standard wording for SR?           

No, standard suitability report wording is no longer provided by M&G.

Is Growth in a Loan Trust a PET?

No, the growth builds up outside of the estate so no gift is being made.

Can you use the small gifting exemption of £250 for trusts? And each year, each trust could have its own £250 exempt amount?

The £250 small gifts exemption can be used for gifts to individuals, but not to discretionary trusts.

Is there any issue if a client with an existing loan trust, later wants to take the tax deferred allowance and do a DGT with it?         

You cannot convert a loan trust into a DGT directly. You would need to withdraw the loan, then use the proceeds to set up a DGT. If the loan repayment was within the available tax deferred allowance then no charge gain would occur.

What happens if the gifter moves to Spain on a permanent basis?

If the settlor becomes non-UK resident, tax treatment of the bond and trust may change. UK IHT may still apply to UK assets, but income/gains may be taxed differently. Specialist advice is recommended.

If the Settlor and life assured are the same and there is only one life assured, on death of the life assured, does the bond value fall in the settlor's estate?          

If the settlor is the sole life assured, the bond ends on death and the value of the outstanding loan is included in the estate for IHT.

Whilst the benefits are clear, the client explanation is tough to clarify. Any tips on how to simplify the explanation whilst meeting regulatory requirements?      

I think the simplest way of explaining a loan trust is that you retain access to your original capital (the loan), but any growth is outside your estate for IHT. You can take your money back at any time, but the growth is for your beneficiaries. In terms of meeting regulatory requirements I would direct that to your compliance.

If the settlor goes into care can the local authority insist on both outstanding loan and any growth in the trust to be returned for care fees?   

The outstanding loan is treated as an asset for care fees. The growth is not, unless there is evidence of deliberate deprivation of assets.

For a deed of variation, does this have to be to a beneficiary not named in the Will or is there no restriction?

The beneficiary varying their inheritance must be named in the Will otherwise they would have nothing to vary. There is no restriction on who the beneficiary directs their inheritance to. A deed of variation can benefit anyone, whether or not they are named in the Will, as long as all affected beneficiaries agree.

Where do we stand when we are not solicitors advising on trusts?

Advisers can recommend trusts but should not draft bespoke trust documents. Use provider-drafted trusts for standard cases; refer to a solicitor for bespoke needs.

Could settlor take 5% withdrawal as repayment or loan then gift away as normal expenditure if not required?             

Loan repayments are capital not income so would not qualify for the purposes of calculating surplus income to make use of the normal expenditure out of income exemption.