T
a client the opportunity to
dip their toe into the water
as far as IHT planning is
concerned without making
an outright gift, while protecting
the capital earmarked
for the strategy
from any further IHT
liability.
A trust is established
with a sum of money being
lent to the trustees, who in
turn invest in an asset that
is likely to appreciate in
value.
Offshore insurance
bonds are particularly suitable
investments due to
the income/capital gains
tax benefits and the ease of
administration from a trustees
perspective. All
growth on the asset purchased
by the trustees is
outside of the lenders
estate for IHT purposes
and is held on bare or discretionary
trusts (from
which the lender is excluded)
depending on the provisions
of the trust.
The most appealing
feature of this type of
planning – IHT benefits
aside – is that should the
lender require any or all of
the outstanding capital
originally lent to the trustees,
it must be repaid
upon demand.
l IHT consequences
As the capital used to
create the trust is a loan
and not a gift, the creation
of the trust is IHT-neutral.
Nothing has been given
away, so only the value of
the outstanding loan
remains in the estate of the
lender for IHT purposes.
All growth is excluded, so
the value of the capital
used to create the trust is
effectively frozen.
l Repayment of loan
The value of the loan must
be repaid to the lender as
and when requested, and
as such the lender has
full access to all of the
original capital.
Where an insurance
bond is used as the trustees
investment, the trus-
tees can take annual
withdrawals of up to 5% of
the premiums paid per
policy year without creat-
example: ihT savings with loan trust
Bond balue taxable (£000s)
500
400
300
200
100
0
No loan trust
Source: Royal London 360˚
example
John has £300,000 in liquid assets. He is aware that when combined
with the rest of his estate this amount creates an IHT liability, so he
considering ways of mitigating this while undertaking some planning
for his family members.
But the combination of being uncertain about his future
financial position and his reluctance to make absolute gifts to his
grandchildren (whom he regards as financially immature) has
presented him with a bit of a problem. John also has a requirement
to receive £15,000 pa for the immediate future.
A loan trust is established (John being the settlor/lender)
with his adult children, as trustees and his grandchildren as fixed
beneficiaries. He gives the trustees an interest-free loan of £300,000
who in turn invest the loan in an insurance bond.
To satisfy John’s income requirements, the trustees arrange
for annual withdrawals of 5% to be paid which are treated as loan
repayments. Providing he spends this money, his IHT estate is
reduced by the same amount. After 20 years the loan will have been
repaid and while he can receive no further payments, the value of
the bond will be outside of John’s estate for IHT.
Should he die before he has received the full amount of the
loan, the value of the loan then outstanding will form part of his
assessable estate for IHT purposes but not the actual value of the
bond. The growth on the bond is excluded for IHT purposes.
Periodically, John decides that he does not require the annual
£15,000 additional income, so he decides to write it off with the
event being recorded by a suitable deed. As the trust was established
with fixed beneficiaries, this is treated as a potentially exempt
transfer and could be reduced to £12,000 if he has not used his
annual £3,000 exemption.
Due to the fact that the trust has been established on fixed
beneficiary provisions rather than flexible, there is no IHT charge on
the trust every ten years, but even if there were, the value of the loan
outstanding on those ten-yearly anniversaries would be deductible
from the value of the insurance bond in assessing the amount
subject to tax. The trustees would also have a nil rate band and so
could be relatively confident that no IHT will actually be payable on
the first ten-year anniversary.
To avoid the bond being fully/partially surrendered on his
death to facilitate repayment of the outstanding loan, John’s will is
amended to include a clause writing off the loan outstanding at that
time. Alternatively he could leave the right to the outstanding loan
repayments to an adult beneficiary.
£60,000 saving
Exempt from IHT
Loan trust
technical
ing an income tax liability
and pay these amounts to
the lender.
l Further opportunities
Should the lender find that
their financial circumstances
are such that they no
longer need access to all of
the capital, then further
IHT planning can be undertaken
by writing some or
all of it off.
Depending upon the
provisions of the trust, any
part of the loan that is
written off will either
be a potentially exempt
transfer or a chargeable
lifetime transfer.
“
Quite simply,
[a loan trust]
affords a client the
opportunity to dip
their toe into the
water as far as IHT
planning is concerned
without making an
outright gift, while
protecting the capital
earmarked for the
strategy from any
further liability
”
MAy 2009 [www.international-adviser.com] INTERNATIONAL ADVISER 39
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