From what a loan trust actually is, to who it could help – in this article, the Quilter team shine a light on this complex arrangement.
A loan trust lets your client (the settlor) make an interest‑free loan to their chosen trustees, repayable on demand.
The trustees invest the loan to target long‑term growth for the beneficiaries.
You still get the usual trust-planning benefits – choice of beneficiaries, control through trustees, and growth outside the estate.
But the real advantage is simple: the settlor makes a loan, not a gift.
No entry charge, even for larger sums
Because the settlor is not making a gift, the loan itself remains in the estate for IHT.
That means any amount can be lent to a discretionary trust without triggering an entry charge – useful where the nil‑rate band (NRB) has already been used on lifetime gifts, but the client still wants the flexibility of a discretionary trust.
IHT efficiency still comes from the growth: investment gains sit outside the estate from day one.
Your client keeps market exposure without adding to their IHT liability.
Loan repayable on demand
The settlor can recall the loan at any time, in full or in part – offering flexible access to capital.
That makes a loan trust a great introduction to trusts and IHT planning, especially for clients early in retirement who are still unsure what they’ll need.
The trust is often paired with an investment bond, giving the trustees a 5% tax‑deferred allowance that can be used to fund repayments.
This can allow the loan to be repaid over up to 20 years without triggering a chargeable event.
Where repayments need to exceed the available allowance, a bond split into identical segments can help manage larger withdrawals efficiently.
Turn a loan into a gift
The settlor can waive some or all the loan, at any time. This is a gift for IHT and will fall outside the estate if the settlor survives seven years.
It gives your client a simple way to take the next step in their IHT planning, without encashing the underlying investment or setting up a new trust.
Choosing the right loan trust
Loan trusts are common, but they’re not all the same. Here are key differences to check.
Joint settlors, what happens on first death?
Where the trust is jointly settled, it’s vital to understand what happens when one settlor dies.
With tenants in common, the deceased’s share of the loan passes to their estate and is distributed under their Will or the rules of intestacy.
With joint tenancy, the outstanding loan automatically vests in the survivor, allowing repayments to continue uninterrupted.
When markets fall, who makes up the shortfall?
The settlor can ask for repayment in full at any time, but if market values have fallen there may not be enough in the trust to repay the loan.
Under an unlimited liability loan agreement, trustees could be personally liable for any shortfall. With limited liability, the amount repayable is capped at the value of the trust fund when repayment is requested.
All talk and no deed
Not all insurers provide the full set of deeds needed to maintain the trust and maximise flexibility.
Look for providers offering a complete package, including draft deeds to change trustees, waive the loan, and assign the bond.
Summary
In short, loan trusts can help a client starting out on their IHT planning journey or complement existing planning for those further along the line.
Its limited IHT saving is balanced with its flexibility to adapt to changing circumstances. Visit quilter.com to access information on our range of trusts, including a tool to help identify the right trust solution for your client.
For more information on trusts, visit quilter.com.
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