Loan Trust

Mr A is married and aged 66.  He has an estate valued at £650,000 including around £100,000 in liquid assets available for reinvestment.  Mr A’s Will leaves his estate to his children and he realises that they will have an IHT bill.

Mr A would like to lessen the potential IHT bill.  However, whilst he is not spending any of the capital, he needs an income stream from his investments to support his standard of living and he cannot make any additional gifts as he does not want to lose access to the capital.

He discusses an investment bond with his adviser and whilst understanding that the value of the bond can fall, he is happy to take this risk.  He therefore takes out a Loan Trust with an investment bond as the chosen vehicle and makes a loan of the capital to the designated Trustees.  The loan repayments are set up back to Mr A, at least until the loan is fully repaid (eg at 5% per annum repayments, the loan would be repaid in 20 years).  Mr A actually requests an annual loan repayment of £4,000, but he is aware that that this amount can be reduced or improved.

If we assume that the investment bond grows at 4% per annum after all charges, and that he dies after 12 years, the investment bond will still be worth £100,000 (as the growth has offset the loan repayments) and the outstanding loan would now be just £52,000 (ie. £100,000 minus 12 years of £4,000 repayments).  Therefore £52,000 will be included in Mr A’s estate and £48,000 will not, giving an IHT saving of 40% of £48,000 = £19,200.

The advantage here is that Mr A has the ability to recall the full loan at any time, reducing the IHT advantages, but keeping the flexibility he requires.

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