The use of trusts generally remains a valuable tool when it comes to wealth protection, estate planning and mitigating IHT exposure. Trusts offer a useful way of managing assets, for instance if you are concerned your children/family may be unable to manage them wisely when you are no longer around.
A loan trust is usually funded by way of an interest free loan from the settlor, and the trustees then invest these funds and manage the assets. This planning is flexible, allowing the settlor to call on these funds later in their retirement if needed. The settlor and their spouse, who can act as the trustees, should be excluded from benefitting from the trust to remove the possibility of the gifts with reservation provisions applying, which would remove any tax benefits.
By making a loan, the settlor is not making a transfer for IHT purposes, because the value of the loan would remain in their estate. It is essentially the growth in the assets that is removed from the estate of the settlor, where a loan trust is used effectively. The loan outstanding can be repayable in the settlor’s life or by their estate on death, which provides the settlor with reassurance that the funds are not being given away forever, should they be required in retirement.
It is typical for the funds loaned to be invested in a single premium bond, but other types of investments may be made, such as holding a residential property in the loan trust for the beneficiaries to live in (potentially allowing for the trust to realise a gain on the property tax free). Single premium bonds are often used because of the Income Tax position. It is possible for the trustees to make partial repayments of the loan, utilising the annual tax-free withdrawals of up to 5% of the initial investment, without triggering any Income Tax charges.
The loan trust may be either an Absolute Loan Trust or a Discretionary Loan Trust. A Discretionary Trust provides more control over the distribution of income and capital, while an Absolute Loan Trust gives the beneficiaries an automatic right to receive the trust income.
The trust will be subject to ten-year anniversary charges and also exit charges, if there are any capital distributions to beneficiaries, but these should amount to no more than 6% of the value of the Trust Fund (after deducting the settlor’s loan i.e. any charges should only apply to the growth of the assets).
The use of trusts generally remains a valuable tool when it comes to wealth protection, estate planning and mitigating IHT exposure. Trusts offer a useful way of managing assets, for instance if you are concerned your children/family may be unable to manage them wisely when you are no longer around.
A loan trust is usually funded by way of an interest free loan from the settlor, and the trustees then invest these funds and manage the assets. This planning is flexible, allowing the settlor to call on these funds later in their retirement if needed. The settlor and their spouse, who can act as the trustees, should be excluded from benefitting from the trust to remove the possibility of the gifts with reservation provisions applying, which would remove any tax benefits.
By making a loan, the settlor is not making a transfer for IHT purposes, because the value of the loan would remain in their estate. It is essentially the growth in the assets that is removed from the estate of the settlor, where a loan trust is used effectively. The loan outstanding can be repayable in the settlor’s life or by their estate on death, which provides the settlor with reassurance that the funds are not being given away forever, should they be required in retirement.
It is typical for the funds loaned to be invested in a single premium bond, but other types of investments may be made, such as holding a residential property in the loan trust for the beneficiaries to live in (potentially allowing for the trust to realise a gain on the property tax free). Single premium bonds are often used because of the Income Tax position. It is possible for the trustees to make partial repayments of the loan, utilising the annual tax-free withdrawals of up to 5% of the initial investment, without triggering any Income Tax charges.
The loan trust may be either an Absolute Loan Trust or a Discretionary Loan Trust. A Discretionary Trust provides more control over the distribution of income and capital, while an Absolute Loan Trust gives the beneficiaries an automatic right to receive the trust income.
The trust will be subject to ten-year anniversary charges and also exit charges, if there are any capital distributions to beneficiaries, but these should amount to no more than 6% of the value of the Trust Fund (after deducting the settlor’s loan i.e. any charges should only apply to the growth of the assets).
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The 60/40 portfolio - bruised, but not battered
