Loan Trust for IHT Planning 2026

A loan trust is a flexible inheritance tax planning tool that gives you the best of both worlds: it removes investment growth from your estate immediately, while allowing you to retain access to the original capital if you need it. Unlike a gift into trust, the money you put in is technically a loan -- you remain a creditor of the trust, not a donor.

What Is a Loan Trust?

A loan trust is an arrangement in which you lend a sum of money to a trust -- typically a discretionary trust -- on an interest-free basis. The trustees invest the money in an investment bond or similar vehicle. Any growth generated by the investment belongs to the trust, not to you, and therefore falls entirely outside your estate for IHT purposes.

You remain a creditor of the trust for the original loan amount. This means the outstanding loan balance is still an asset of your estate and is subject to IHT when you die. However, unlike a gift, you can ask the trustees to repay the loan to you at any time -- in full or in instalments -- if you need access to your capital.

The key IHT benefit is that the trust's investment growth is never part of your estate. It accrues in the trust from day one and belongs to your chosen beneficiaries (or the class of discretionary beneficiaries), not to you. There is no seven-year waiting period for this growth element -- it is simply never yours.

How the IHT Position Works

When you establish a loan trust, you do not make a gift. You make a loan. The IHT implications depend on what happens next.

The loan balance remains in your estate. If you die with GBP 100,000 still outstanding on the loan, that GBP 100,000 is included in your estate for IHT. The trust holds an investment worth (say) GBP 140,000, but owes you GBP 100,000. The trustees repay the GBP 100,000 loan to your estate, and the remaining GBP 40,000 of growth passes to your beneficiaries free of IHT.

The growth is effectively frozen outside your estate from day one. There is no IHT charge on it, no periodic trust charges related to the original loan (though the trust as a relevant property trust will have periodic and exit charges on its value above any NRB), and no seven-year clock.

If you want to accelerate the IHT benefit, you can write off part of the loan during your lifetime. A written-off amount is treated as a gift at the time of write-off, which may be a PET or a CLT depending on the trust type. If you survive seven years from the write-off, that amount also clears your estate entirely. Writing off GBP 10,000 per year, for example, gradually erodes the estate asset over time.

Comparison with a Discounted Gift Trust

The loan trust and the discounted gift trust (DGT) are complementary tools but suit different situations.

With a DGT, you gift the capital into trust irrevocably and retain only fixed income withdrawals. You lose access to the capital completely, but in return the actuarial discount reduces your estate immediately and the gifted capital exits after seven years.

With a loan trust, you retain full access to the capital via repayment of the loan. The downside is that the loan balance remains in your estate until it is repaid or written off. The estate value is frozen (not reduced) -- growth is sheltered, but the original capital is not.

For someone uncertain about their future capital needs, a loan trust is often the more conservative first step. For someone comfortable committing capital permanently and wanting a larger immediate IHT reduction, a DGT may be preferable.

Practical Example -- GBP 150,000 Loan

Margaret is 72 years old with an estate worth GBP 750,000. She is concerned about the IHT bill but may need access to capital for care costs in later life. She decides to set up a loan trust with a GBP 150,000 investment.

She lends GBP 150,000 to a discretionary trust on an interest-free basis. The trustees invest the GBP 150,000 in a diversified investment bond.

Year one position:

• Outstanding loan: GBP 150,000 (in Margaret's estate)
• Trust investment value: GBP 150,000
• IHT position: no change yet

After five years, assuming 5% annual growth:

• Trust investment value: approximately GBP 191,000
• Outstanding loan: GBP 150,000 (assuming no repayments or write-offs)
• Growth outside Margaret's estate: GBP 41,000
• IHT saving on GBP 41,000 at 40%: GBP 16,400

If Margaret writes off GBP 10,000 of the loan each year over five years:

• Outstanding loan after five years: GBP 100,000 (reduced by GBP 50,000 of write-offs)
• Each annual write-off is a CLT using NRB
• After seven years from each write-off, those amounts also clear the estate
• Estate asset reduced from GBP 150,000 to GBP 100,000 through write-offs alone

If Margaret lives another 10 years and writes off GBP 10,000 per year while the trust grows, the combination of growth sheltering and loan write-offs can substantially reduce the IHT exposure over the long term.

Writing Off the Loan

Writing off part of the loan is the mechanism by which you convert the loan trust into an effective gift for IHT purposes. Each write-off is treated as a chargeable lifetime transfer (because it is a gift to a discretionary trust) and uses up your NRB.

In 2026/27 the NRB is GBP 325,000. You can write off up to GBP 325,000 of the loan without incurring an immediate IHT charge, provided you have not made other CLTs in the previous seven years. Write-offs in excess of your remaining NRB trigger a 20% lifetime IHT charge at the time of the write-off.

Practical loan write-off strategies include annual write-offs of modest amounts to stay within the NRB, writing off the entire loan at once if it is within the NRB, or combining write-offs with other annual exemptions (the GBP 3,000 annual exemption for IHT purposes, gifts from normal expenditure out of income, etc.).

Once written off, a portion of the loan cannot be reclaimed. Write-offs are irrevocable, so they should be timed carefully and only when you are confident you no longer need that capital.

Repaying the Loan

One of the main practical advantages of a loan trust is that you can request repayment of the outstanding loan at any time. The trustees are obliged to repay the loan on demand (subject to available funds in the trust). You can request full repayment, partial repayment, or regular instalments.

Repaid amounts return to you as cash and are back in your estate. There is no IHT advantage to taking repayments -- you are simply moving an asset from the trust (where the loan was already in your estate) back to your bank account (also in your estate). However, it gives you the safety net of knowing you can access your capital if circumstances change.

This flexibility makes loan trusts popular with risk-averse investors or those who may face significant care costs and are unwilling to commit capital irrevocably.

Trust Tax Treatment

If the loan trust uses a discretionary trust structure, it is a relevant property trust for IHT purposes. This means:

Periodic charges arise every 10 years on the value of the trust assets above the NRB applicable at that time. The charge is up to 6% of the excess.

Exit charges arise when assets leave the trust (for example, on distributions to beneficiaries). The charge is a fraction of the 6% periodic charge rate, depending on how long the assets have been in the trust.

In practice, for loan trusts the value subject to periodic charges is the trust investment value minus the outstanding loan (because the loan is a liability of the trust). If the trust investment equals the outstanding loan, the net value is zero and no periodic charge applies. As the investment grows above the loan balance, the excess becomes subject to potential periodic charges.

These charges are generally modest compared with the IHT saving achieved by sheltering growth from the settlor's estate.

Suitable Investors for a Loan Trust

Loan trusts work best for people who have an IHT problem and a reasonable life expectancy, giving time for the trust investment to grow. They are particularly suitable for those who are uncertain whether they will need to access capital -- for example, to fund care costs -- because the loan can always be repaid. They also suit investors who are uncomfortable with the irrevocability of a gift-based arrangement like a DGT or an outright gift.

People in poor health may be better served by a discounted gift trust with medical underwriting, which can produce a larger immediate IHT reduction. However, a loan trust has no health requirements and can be established regardless of medical status.

Loan trusts are also useful as a complement to other planning. For example, someone who has already used their NRB through previous CLTs can use a loan trust without creating further chargeable transfers, because the loan itself is not a gift.