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The Loan
Trust
(26/11/2006)
Loan Trust arrangements are designed to assist those individuals
who wish to undertake some inheritance tax planning but do not
feel able to make significant gifts.
The settlor (investor) makes an interest-free loan to the
trustees who invest in an offshore bond for the benefit of the
specified beneficiaries, such as children. The settlor retains
access to the value of the outstanding loan and has the right to
have the loan repaid in whole or in part at any time.
Any growth on the loan accumulates for the beneficiaries, is
outside of the settlor’s estate and is therefore free of
inheritance tax on the settlor’s death. The balance of the
outstanding loan remains in the settlor’s estate for inheritance
tax purposes.
By establishing a trust under which the settlor does not have
any beneficial interest, the settlor will effectively remove the
trust fund (after deduction of any outstanding loan) from his
taxable estate for inheritance tax. The settlor has full access,
at any given time, to the amount of the loan outstanding but the
remainder of the trust fund (incorporating the growth on the
investment) is outside the settlor's estate for inheritance tax
purposes.
Also, the fact that the investment is held subject to trust
means that the investment will not be in the settlor’s estate
for the purposes of probate.
Benefits for You and your Family
The investor (settlor) establishes the Loan Trust under which
trustees are appointed.
The trust will be for the initial benefit of specified
beneficiaries, usually the settlor’s children. However, the
trustees have power to benefit any person who falls within one
of the specified classes of discretionary beneficiaries.
The settlor is not (and cannot be) a beneficiary under the trust
and so cannot benefit from the trust. Although the settlor's
spouse is a potential beneficiary, payments to the spouse during
the settlor's lifetime could trigger the ‘gift with reservation’
rules, if the settlor were to derive any benefit. Great care
should be taken therefore to ensure that any payment made by the
trustees to the settlor’s spouse cannot benefit the settlor,
however indirectly. An appointment to the settlor's widow after
the settlor's death would not carry this risk.
The Loan
The settlor grants an interest-free loan, repayable on demand,
to the trustees. The making of the loan is evidenced by a
written loan agreement. Candour Consultancy can provide a draft
agreement.
The trustees invest the amount of the loan in an offshore bond,
on the lives of the named beneficiaries under the trust, on a
last survivor basis.
If the settlor appoints himself as one of the trustees, he,
together with the other trustees, retains legal control over the
trust fund. The flexibility of the Loan Trust allows variation
of the beneficiaries under the trust, should this be desired.
Loan Repayments
The settlor may request repayment of the loan in whole or in
part. The trustees request a part- surrender from the bond and
pay this to the settlor.
When loan repayments are kept within the 5% per annum limit,
under current legislation, there is no immediate charge to
income tax, although the amounts withdrawn will be taken into
account for tax purposes on the eventual encashment of the bond.
This favourable tax position may not be maintained in the
future.
However, if more than the allowable cumulative 5% is withdrawn,
a chargeable event will occur. Under current legislation, all
chargeable policy gains made under the bond would be assessed on
the settlor during his lifetime and whilst he remains UK
resident, thereafter on the trustees whilst UK resident.
Summary
Benefits of the Loan Trust:
-
As legal ownership of the bond is with the trustees, once the
trust is established, the growth on the investment is outside
of the estate of the settlor for inheritance tax purposes.
-
The investor retains full access to an amount equal to the
outstanding loan.
-
The growth on the investment is held for the benefit of named
beneficiaries, such as extended family, but the trustees have
power to benefit others at any time during the trust period.
-
The investor can maintain a degree of legal control by being
one of the trustees.
-
The trustees cannot distribute assets without the settlor’s
prior consent.
-
As the trustees have power to make loans (as well as advances)
to any beneficiary, further inheritance tax planning can be
undertaken, thus increasing the overall tax-effectiveness of
the arrangement.
-
As the investment is held subject to trust, the investment
will not form part of the investor’s estate for the purposes
of probate.
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