Courtiers Wealth Management
Courtiers Wealth Management

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Covering your Heirs with a Cap

26 Apr 2016

“What’s the difference between a taxidermist and a tax collector? A taxidermist only takes your skin”
Mark Twain, Author (1835-1910)

Would you like to know how your heirs could pay less Inheritance Tax (IHT) when you pass on your hard earned estate, while you still have access to that capital whilst you’re alive? Often these two prove to be mutually exclusive but by using a Loan Trust you can achieve both.

While some trusts (particularly offshore trusts) have received much negative press of late, trust planning is an entirely legitimate method of mitigating your IHT liability and can actually be a fairly simple concept.

Who could benefit from a Loan Trust?

Firstly, you’ll need to have an IHT problem. That would mean having assets that total £325,000 (£650,000 for a married couple or civil partners) or a reasonable expectation that your assets will grow above that value*.

You’ll also need for some of those assets to be liquid (cash deposits or in an investment vehicle other than a pension) and surplus to your requirements for day-to-day living. Although they are currently surplus, you’ll be in a position where you’ll want to retain some access to them just in case you might need it in the future.

What is a Loan Trust?

A Loan Trust is a vehicle designed to control how your assets are passed to your beneficiaries. The trustees act on your behalf and in accordance with your declared wishes. You can choose to be one of the trustees and you would usually set the trust up on a Discretionary basis, meaning you, or the trustees, can change the beneficiaries whilst the trust is in place.

The diagram below shows how a Loan Trust works:

Advantages of a Discretionary Loan Trust

Disdvantages of a Discretionary Loan Trust

  • Future growth not subject to IHT.
  • Initial loan to the trust is repayable to you on demand.
  • If you no longer require access to the loan repayment you may gift the loan (and potentially reduce your IHT liability further).
  • Assets can be passed to your beneficiaries before or after your death.
  • You can change the beneficiaries through the life of the trust.
  • Won’t reduce your current IHT liability.
  • No personal benefit from any growth in the assets in t rust
  • As the trust will be invested, the value of the trust could go down if the value of those investments fall.
  • Depending on the type of investment you may need to submit an annual tax return for the trust.**
  • You must keep accurate records of the payments into and out of the trust to show repayment of the loan and any distributions to beneficiaries.


IHT can be a very complicated topic with seemingly endless options available. Some of these options are complex and some are structured to push the boundaries of acceptable conduct (in the eyes of the taxman).

Loan Trusts are neither. They offer an excellent half way house for IHT mitigation. If you’re not comfortable with giving away access to some of your capital, Loan Trusts offer a way to retain that access but capping the future liability to IHT on that sum.

If you’d like to discuss your specific circumstances or want to investigate other options, then please contact your Courtiers Adviser who will help you analyse your current situation, financial objectives and priorities and make recommendations to enable you to achieve them.

Please note: Tax Treatment depends on individual circumstances and is subject to change.

*There are changes coming to this limit. Details can be found in our recent article “Inheritance Tax – Changes afoot”

**Courtiers will provide you with this information and if required can introduce you to a suitable accountant to prepare the necessary returns.

Warning – the views expressed by Courtiers in this summary and any video and video transcripts, are reached from our own research. Courtiers cannot accept responsibility for any decisions taken as a result of reading this document, watching the featured video or reading the video transcript and investors are recommended to take independent professional advice before effecting transactions. The price of stocks, shares and funds, and the income from them, may fall as well as rise. Past performance is not necessarily a guide to future returns.

We do not endorse nor accept responsibility for the content of any website not operated by Courtiers which you may visit by following a link from this article.

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