Answers · UK 2025/26
What is a loan trust and how is it used for IHT planning?
A loan trust involves lending money interest-free to a trust. The loan stays in your estate (it is a debt owed to you), but all investment growth accumulates inside the trust and is immediately outside your estate. You can call in the loan at any time, and gradually write it off using annual gift exemptions to shrink the estate.
Full answer
A loan trust is an IHT planning structure in which you lend a sum of money (typically interest-free, which is permitted for IHT purposes) to a trust. The trustees invest the loan, and any growth on the investment accrues inside the trust -- outside your estate from day one. Only the outstanding loan balance remains in your estate. The mechanics: you establish the trust (usually a discretionary trust) and make a small initial gift to it (e.g. GBP 100). You then lend the bulk of the money -- say GBP 250,000 -- to the trustees on an interest-free basis, repayable on demand. The loan is documented in a formal loan agreement. The trustees invest in a suitable investment bond or portfolio. What is in your estate? Only the outstanding loan balance. If the investment grows to GBP 320,000, the estate asset is still only GBP 250,000 (the loan). The GBP 70,000 growth belongs to the trust beneficiaries. Reducing the loan over time: you can write off part of the loan each year using your annual gift exemption (GBP 3,000/year), the small gifts exemption (GBP 250 per person), or potentially larger amounts as Potentially Exempt Transfers (PETs). Alternatively, the trustees can repay the loan to you (giving you access to capital), and you can then make gifts from that cash. Flexibility advantage over a DGT: with a loan trust you can get capital back (by calling in the loan) -- unlike a discounted gift trust where you are locked in to fixed income. This makes loan trusts suitable for people who want growth sheltered but need the option to access capital. No actuarial discount: unlike a DGT, a loan trust does not reduce the chargeable transfer immediately -- the full loan stays in your estate. The IHT benefit builds gradually as the loan is written off and growth accumulates. The trust is a discretionary trust subject to the relevant property tax regime (entry charges above GBP 325,000 NRB, 10-year periodic charges at max 6%, exit charges). In practice these charges are often small relative to the IHT saved. Take regulated financial and legal advice before proceeding.
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This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.