Malcolm Finney outlines how the loan trust works and its inheritance tax implications.
The loan trust concept is designed to reduce the inheritance tax (IHT) charge on a person’s estate on death. It does this by ensuring that any growth in value of investment of the loan monies takes place outside the settlor’s estate.
In this sense, a loan trust does not enable IHT to be avoided completely, but minimised.
Mechanics of set up
The usual loan trust is set up as a discretionary trust (or possibly a flexible life interest trust) with a small amount of cash. Once set up, the settlor lends monies to the trustees. The trustees are then free to invest these monies as appropriate.
However, the settlor would like, if possible, to receive some ongoing benefit from the trust during
