A Gift and Loan Trust, which are also known as Loan Schemes, are a popular way of reducing your Inheritance Tax liability without losing access to the capital.
A Gift and Loan Trust (or Loan Scheme) is generally suitable for people who want to retain access to their capital, but do not want their estate to increase in value any further.
How it works:
- You establish a trust, and loan the trust money.
- The trustees invest this money.
- You reserve the right to have the loan paid back in full, or have partial repayments.
- Any growth on the loan falls outside of the value of the estate on death.
- The amount of loan not repaid on death forms part of the deceased’s estate.
- The main advantage is that it puts further growth on money outside of the estate.
Below shows how the loan trust would work, one based on taking repayments to use as income, and one with no repayments of the loan. It assumes that the £100,000 grows over five years to £150,000. Please note this should not be taken to imply this level of growth would be achieved. It is purely to illustrate the potential benefits of this type of scheme.
| No Loan Scheme | Loan Scheme – no repayments | Loan Scheme – repayments at £5k pa | |
| Original Investment | £100,000 | £100,000 | £100,000 |
| Original Investment & Growth after 5 yrs | £150,000 | £150,000 | £120,000 |
| * Repayments made | n/a | n/a | £25,000 |
| Loan amount outstanding and potentially liable to IHT | n/a | £100,000 | £75,000 |
| Amount which escapes IHT | £0 | £50,000 | £65,000 |
| Amount potentially liable to IHT | £150,000 | £100,000 | £75,000 |
| Maximum amount of IHT | £60,000 | £40,000 | £30,000 |
*Please note the amount of growth after five years is only £120,000 as this assumes £5,000 of the fund has been taken out and used as income each year.
A Gift and Loan Trust (or Loan Scheme) is generally suitable for people who want to retain access to their capital, but do not want their estate to increase in value any further.
These are just two of the methods available to reduce your Inheritance Tax liability. There are other strategies that can remove IHT liabilities after only two years, or provide limited but flexible access to capital that has been placed into trust without being considered a gift with reservation.