October 2018


Register with PP

Newsletter, Jobs & Event Alerts


Technical: Loan Trusts Q&A

8 July 2018

Angela Hyslop, technical specialist Prudential, provides insight into use of loan trusts through this quickfire Q&A.

Q1. Are the monies in a loan trust held in separate pots for the settlor and beneficiary by the life company?

A1:As a bond is the asset under our loan trust the monies are not put into separate bonds/pots.  All the monies are held within the same bond, and it is up to the trustees to ensure the settlor only ever receives the loan amount back, and the beneficiaries only receive the growth.

As it is the trustees responsibility (not the life company) to ensure the parties receive the correct amounts from the trust, therefore trustee accounts should be kept to make this all much simpler.

Q2: If the loan trust is an absolute trust and the settlor wants to take repayment of the loan, who is liable for any income tax that may be payable?

A2:Although it is the settlor that is receiving the monies as repayment of the loan, as this is an absolute trust the tax liability still falls on the beneficiary (unless it is a parental settlement for a minor beneficiary).
There aren’t separate pots for tax for the different parties to the trust, it is the type of trust that drives who is liable for any income tax that may be payable.

Q3:Does the loan trust come to an end when the bond is surrendered?

A3:No, the loan agreement and trust do not necessarily end on surrender of the bond.  The trustees would receive the surrender proceeds and, depending on the terms of the trust, there are various options that could be considered, some of which are:

  • The trustees could reinvest the entire proceeds into a new bond
  • If the settlor does not require the outstanding loan repaid, the trustees could reinvest the outstanding loan amount into a new bond and distribute the growth held in trust to the beneficiaries.

Repaying the outstanding loan to the settlor and distributing the growth to the beneficiaries would bring the loan trust arrangement to an end.

Q4: How can the growth be distributed to the beneficiaries?

A4:The growth can be distributed by:

  • Assignment of segments to the desired beneficiaries
  • The trustees surrendering within the available 5% allowance and passing the proceeds to the desired beneficiaries.