Glossary · UK
What is Loan Trust?
An Inheritance Tax planning structure where a settlor lends, rather than gifts, money to a trust, allowing future investment growth to fall outside their estate while retaining the right to call back the original loan capital.
Full Definition
A loan trust is an Inheritance Tax planning arrangement in which the settlor lends a sum of money to a trust, rather than gifting it outright, with the trust then investing the loaned amount, typically in an investment bond. Because the arrangement is structured as a loan rather than a gift, the settlor retains the right to call back the loan capital (or any part of it) at any time, and the outstanding loan balance remains part of the settlor's estate for Inheritance Tax purposes for as long as it is outstanding -- meaning a loan trust does not remove the original capital from the settlor's estate the way an outright gift or a Potentially Exempt Transfer would. The Inheritance Tax benefit of a loan trust instead comes from what happens to investment growth on the loaned capital: because the trust, not the settlor, owns the underlying investment, any growth in value above the original loan amount falls outside the settlor's estate immediately, without needing to survive seven years as a Potentially Exempt Transfer would. This makes loan trusts particularly attractive to settlors who want to remove future growth from their estate for IHT purposes, while retaining full access to the original capital (by calling back loan repayments) in case their financial circumstances change and they need the money back -- addressing a common concern with outright gifting, where the donor permanently loses access to the capital given away. Repayments of the loan can be taken by the settlor as regular withdrawals or as a lump sum, and since these are simply the return of the settlor's own loan (not trust income or capital), they are not normally subject to Income Tax or Capital Gains Tax as they are repaid, though the underlying bond investment itself may generate chargeable event gains taxable on the trustees or beneficiaries in some circumstances. Because the settlor keeps access to the original loan amount, a loan trust achieves a more modest IHT saving than an outright gift of the same sum (only the growth is removed from the estate, not the original capital), making it best suited to people who want some IHT mitigation on investment growth without giving up access to their capital entirely.