What is an inheritance tax loan trust?


I covered inheritance tax two weeks ago, but paused for a self-indulgent rant about COP26 last week.

In the meantime, I had a few more questions about inheritance tax – one of which was how to freeze the value of an estate to prevent an inheritance tax problem from getting worse. as the stock markets and home prices soar.

Inheritance tax is that large 40% levied on part of your estate after the relevant allowances have been taken into account. It’s not very popular, especially when compared to a good glass of wine, or a vacation for example.

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One obvious choice is to donate our excess income each year, as this falls under gifts outside of normal expenses. If you have excess income, you can donate as long as it is regular and the transferor has enough income to maintain their normal standard of living. In addition, you have the advantage of seeing the children benefit from the gift. Nice feeling of blur.

For larger sums, or even the idea above, there is the risk that the kids will marry someone you just don’t trust. You know the feeling.

There are many options available, but a reader asked about a loan trust, so I’ll cover that. Don’t be fooled by the word “trust”. It is simply a legal document used by many people with the aim of reducing both inheritance tax and rapid access to capital in the event of death.

A loan trust would normally be used for people who initially want to start estate tax planning, but are afraid or unwilling to give up capital and still want to keep some income from it.

How does a loan trust work? First, you use an independent financial advisor, lawyer, or accountant to create a trust for you. You then lend money to the trust and appoint your trustees (your advisers do all of this for you). The trustees (the people you appoint who will ensure that the trust is executed properly) now invest this money as you wish and for the ultimate benefit of the beneficiaries (to whom you want the money to go).

You can then set up a loan repayment from the trust at the rate of a 5% tax-deferred withdrawal paid to you. However, all fund growth occurs outside of the estate, so if the fund chosen by the trustees has performed well, it is not part of the estate at all, capping any future growth.



Peter McGahan, Managing Director of Worldwide Financial Planning

When you withdraw “income” (your loan payments) from the trust, in accordance with the loan agreement, and spend it, that capital falls out of your estate. If you decide to take back the entire loan at any time, you can do so, leaving the growth to the beneficiaries.

You can set up two types of trusts: an absolute trust and a discretionary trust.

With absolute confidence, you indicate the beneficiaries and their rights at the beginning and cannot change them. The beneficiaries of an absolute trust can, after 21 years, request access to the value of the growth part of the fund.

With a discretionary trust, the settlor (the person who sets up the trust) can change the beneficiaries at any time, and what they are entitled to (see the questionable boyfriend point above). Under a discretionary trust, however, there could be an ongoing tax burden. On the 10th anniversary, if the value of the trust is above the zero rate band at that time (currently £ 325,000), a periodic fee will be payable.

Disadvantages? When you pay off the loan – it’s been 20 years if you take 5% – you no longer have any benefits since the loan has been repaid. Of course, you don’t have access to growth either, but that was the point – freezing that part of your estate.

Be careful who invests the underlying capital. Setting up a trust is easy, but the difference in cost and performance in the underlying money can be wiped out in a matter of years if you don’t have a quality manager looking after your money.

If you have a question about inheritance tax or a discounted gift trust, please call 01872 222422 or email [email protected] or visit us at www.wwfp.net

Peter McGahan is the Managing Director of the independent financial advisor Worldwide Financial Planning . Worldwide Financial Planning is authorized and regulated by the Financial Conduct Authority. The FCA does not regulate credit cards, the drafting of wills, and some forms of mortgage and estate planning.

The information provided is for guidance only and specific advice should be taken before acting on any suggestions made. All information is based on our understanding of current tax practices, which are subject to change. The value of stocks and investments can go down as well as up. Your home can be repossessed if you don’t pay off your mortgage.

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