Loan Trust: A Complete UK Inheritance Tax Guide for 2026/27
A Loan Trust lets you reduce future Inheritance Tax on investment growth while keeping the right to have your original capital repaid on demand. This guide explains how it works, how it differs from a gift trust, and what happens if the loan is never fully repaid.
A Loan Trust involves lending a sum of money — typically interest-free and repayable on demand — to trustees, who then invest it on behalf of beneficiaries you have chosen. Because the arrangement is structured as a loan rather than a gift, you retain a right to ask for the money back at any time, which is a key difference from an outright gift into trust.
Loan Trust vs Gift Trust
With a straightforward gift trust, the entire amount given away is either a potentially exempt transfer (falling outside your estate after seven years) or a chargeable lifetime transfer (potentially taxed immediately), and you typically give up all future access. With a Loan Trust, the amount you lent stays as part of your estate — it is simply a debt owed back to you — but any investment growth in the trust above that loan amount is immediately outside your estate, without needing to wait seven years.
Requesting Repayment
Because most Loan Trusts are set up as repayable-on-demand arrangements, you can generally ask the trustees to repay some or all of the outstanding loan at any time, giving you continued access to your original capital if your circumstances or income needs change — a flexibility an outright gift does not offer.
What Happens at Death
If any part of the loan remains outstanding when you die, that outstanding amount (not the full value of the trust fund) forms part of your estate for Inheritance Tax purposes, since it is still legally a debt owed to your estate. The remaining growth in the trust fund, above the outstanding loan, stays outside your estate and passes to the trust beneficiaries according to the trust terms.
Waiving the Loan Over Time
Many people using a Loan Trust choose to formally waive part of the outstanding loan periodically — often using the annual £3,000 gift exemption, or the exemption for gifts out of normal income — converting that portion of the debt into a gift at that point. Each waiver then starts its own potentially exempt transfer or chargeable lifetime transfer clock, gradually moving more of the original capital outside the estate over time.
Who a Loan Trust Suits
A Loan Trust suits people who want to begin reducing future Inheritance Tax — particularly on investment growth — but who are not ready to permanently give away their capital, perhaps because they may need it later or simply want the reassurance of retained access. It sits between doing nothing at all and making an outright, irrevocable gift, and is usually set up and administered with the help of a financial adviser or solicitor.
A Loan Trust is an Inheritance Tax planning arrangement where you lend money (rather than gift it) to trustees, who invest it for the benefit of beneficiaries you choose. Because it is structured as a loan, you retain the right to have it repaid, while any investment growth above the loan amount falls outside your estate immediately.
How is a Loan Trust different from a gift trust?
With an outright gift into trust, the whole gifted amount potentially falls within a potentially exempt transfer or chargeable lifetime transfer, and you generally give up all rights to it. With a Loan Trust, the amount you lent remains part of your estate (as a debt owed back to you) until repaid or waived, but crucially, any growth in the trust's investments above the original loan is immediately outside your estate, without needing to survive seven years.
Can I ask for my loan to be repaid?
Yes, most Loan Trusts are set up on an interest-free, repayable-on-demand basis, meaning you (or your estate, if you have died) can generally request repayment of some or all of the outstanding loan at any time, providing valuable flexibility compared with an outright gift.
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Does the loan itself reduce Inheritance Tax?
No, not on its own. The outstanding loan amount remains part of your estate until it is repaid to you or formally waived (which would itself then be treated as a gift). The Inheritance Tax benefit of a Loan Trust comes specifically from the investment growth above the original loan being outside your estate from the outset.
What happens if I never ask for repayment?
If the loan is never repaid and remains outstanding at your death, the value of the outstanding loan (not the full trust fund) is included in your estate for Inheritance Tax. Any growth in the trust fund above the outstanding loan amount, however, remains outside your estate.
Can I waive the outstanding loan later?
Yes, many people choose to waive some or all of the outstanding loan over time (for example, using annual gift exemptions), which converts that part of the loan into a gift for Inheritance Tax purposes at that later date, starting a new potentially exempt transfer or chargeable lifetime transfer clock.
Is the interest-free nature of the loan itself taxed?
No, an interest-free loan of this kind is not generally treated as giving rise to a taxable benefit, since this is a well-established structure used specifically for this type of Inheritance Tax planning, rather than, for example, an employment-related loan.
Who is a Loan Trust suitable for?
A Loan Trust suits people who want to start reducing future Inheritance Tax on investment growth but who are not ready to give up access to their original capital outright, providing a middle ground between doing nothing and making an irrevocable gift. As with any trust arrangement, professional advice is recommended before setting one up.
What happens to unused loan repayments if I don't spend them?
If you draw down loan repayments but do not spend them, the repaid cash simply becomes part of your estate again like any other asset, since it is no longer inside the trust. Some people therefore only request repayments they actually intend to use, or reinvest surplus repayments into further estate planning.
Can a Loan Trust be set up using an existing investment bond?
Yes, Loan Trusts are commonly set up using a single-premium investment bond as the underlying investment, with the loan used to purchase the bond in the trustees' names. This is a well-established structure offered by most UK life insurers and investment providers for this purpose.
Disclaimer: Trust and Inheritance Tax rules can change, and investment values can fall as well as rise; check the current position at gov.uk. This guide is general information, not financial, legal or tax advice. Always seek independent professional advice for your specific situation.
