Inheritance Tax Planning – What is a Loan Trust?

Lazenbys Inheritance Tax Planning

The Basics of Inheritance Tax

Inheritance tax is due if your estate is worth over £325,000 when you die and it’s not passed to your spouse or a charity. The current rate is 40% above £325,000 and this is paid by the executor of your estate.

However, there are several inheritance tax allowances that can limit how much inheritance tax your estate has to pay.

Firstly, you can leave your home to your family tax-free. If you pass on your home to a child or grandchild (the allowance only applies to direct descendants), there’s a nil-rate band of £175,000. This is on top of the standard inheritance tax allowance of £325,000.  As a result, you can leave as much as £500,000 tax-free yourself or £1 million between a couple.

Also, gifts to family and friends of up to £3,000 each year during your life don’t count towards inheritance tax. While gifts above £3,000 can count towards inheritance tax if you die within 7 years of making the gift.

What is a Loan Trust?

With a loan trust, the investment returns from your assets are kept outside your estate. This can reduce how much inheritance tax is due on your estate.

Your assets remain part of your estate, but as the ‘settlor’ you lend your assets to the loan trust.  The returns on these assets stay within the trust and so are outside your estate for tax purposes. As a result, on your death the growth from your assets is passed to your beneficiaries.

When Should You Consider Using a Loan Trust?

A loan trust allows you to keep control of your assets because you have access to your original capital so you can still benefit from the value of the assets.

For example, after setting up a loan trust you could choose to take 5% in income from the asset. However, this would be for a maximum of 20 years, as it would use all the capital. The length of time you could take the income would also depend on the value of the investment. Because a poor performance coupled with an annual income is likely to affect the value of the original capital.

How Do You Set Up a Loan Trust?

Trusts are a complex area because the steps you need to follow have to take place in a specific order. Otherwise, you won’t be able to realise the benefits of this approach.

As a result, it’s important to get professional advice from a solicitor or an independent financial advisor who can create a loan trust.

Please Note:

The FCA does not regulate Trusts and some forms of offshore investment and inheritance tax planning.

The value of the investment can go down as well as up and you may not get back as much as you put in.

If you would like to speak to us about inheritance tax planning and loan trusts please email [email protected].

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