Comparison Β· 2026/27
Discounted Gift Trust vs Loan Trust
Both trusts let you remove future investment growth from your estate for Inheritance Tax while keeping some access to your money β but they work in very different ways. A Discounted Gift Trust gives up capital for a fixed income; a Loan Trust keeps the capital accessible as a repayable loan.
At a Glance
| Feature | Discounted Gift Trust | Loan Trust |
|---|---|---|
| Nature of arrangement | Gift with retained fixed payments | Interest-free loan to trust |
| Access to original capital | None β gift is permanent | Yes β can demand loan repayment |
| Immediate IHT reduction | Discount applied straight away | Only investment growth is outside estate |
| Regular payments | Fixed, set at outset | Ad hoc loan repayments only |
| Underwriting needed? | Yes β age/health assessed for discount | No underwriting required |
| Best suited to | Those confident they won't need capital back | Those wanting flexible future access |
Both arrangements interact with the Β£325,000 nil rate band and the 7-year rule for 2026/27. Take regulated financial advice before setting either up.
How a Discounted Gift Trust Works
You transfer a lump sum, typically into an investment bond held in trust, while retaining the right to fixed regular capital withdrawals for the rest of your life or a chosen term. Because you have given up rights to the underlying capital but kept a right to payments, an underwriter calculates a discount β the estimated value of those future payments based on your age and health β which reduces the value of the gift counted for Inheritance Tax from day one.
The remaining, un-discounted value of the gift is treated as a Potentially Exempt Transfer, falling fully outside your estate if you survive seven years. Once set up, the arrangement cannot be unwound β you cannot ask for the underlying capital back, only the agreed regular payments.
How a Loan Trust Works
You lend a sum, interest-free, to trustees who invest it β usually in an investment bond β for the benefit of chosen beneficiaries. Because it is legally a loan, you retain the right to ask for full or partial repayment at any time, keeping flexible access to your original capital throughout your life.
Any growth in the investment above the value of the outstanding loan belongs to the trust and its beneficiaries, and falls outside your estate immediately β there is no need to wait seven years for that growth. The outstanding loan itself remains part of your estate as a debt owed back to you, until repaid, waived, or given away as a further gift.