As a grandparent, one of the most important goals you’ll work towards is leaving a legacy behind for your loved ones. Although this may be a priority for many, it’s not always a possibility.

If you wish to leave a gift behind for your nearest and dearest, but you think you’ll require access to your original capital in the future, you could benefit from establishing a Gift and Loan Trust. This flexible loan can help individuals make the most of Inheritance Tax planning, without sacrificing too much financial stability.

What is a Gift and Loan Trust? 

Essentially, a Gift and Loan Trust is a loan extended to Trustees  on an interest-free basis.

Since you are essentially making a loan to the Trust, you can still access the remaining capital through regular or impromptu withdrawals. Withdrawing capital does not reduce your risk of incurring tax costs, as it puts the money back into your estate for IHT purposes. Only the capital in your Trust, and any growth it experiences, could be exempt from IHT, as long as no threshold regulations are breached. The repayment of the loan can be waived, partially or in full, at any given time.

How do they work?  

Gift and Loan Trusts explained in their simplest form, are a type of loan extended to individuals who wish to maximise Inheritance Tax planning but cannot give up full access to their funds.

So, how exactly does a Gift and Loan Trust work? Let’s break it down. 

Firstly, you’ll need to commit £10 to establish your Gift and Loan Trust.

Next, you’ll make a substantial interest-free loan to your Trust which they will then take from the Trust as a loan to use however they wish or need. Any money left in the Trust, if invested, can benefit from IHT tax-free growth, as it won’t be counted as part of your estate. 

This loan can be repayable on demand and, if necessary, it may even be repaid in full over a predetermined amount of time.

You’ll be able to receive regular payments from your Trust, in the form of loan repayments. However, it’s worth noting that you won’t be able to withdraw more than the amount you originally loaned. 

For example, if you were to loan out £100,000 to the Trust and request yearly repayments of £10,000, your repayments will only last 10 years. If you were to pass away before receiving the entire balance, any outstanding capital, as well as existing benefits of the loan, will be passed down to your beneficiaries. 

This type of Gift and Loan Trust Inheritance Tax planning may be useful for individuals who wish to leave a legacy behind for loved ones but cannot risk cutting off access to their funds entirely.

It helps individuals make use of Inheritance Tax planning in a flexible manner, as they can draw from their capital or, adversely, waive loan amounts whenever they please. 

However, it may not be a wise choice for those who wish to make use of their investment growth funds or individuals who don’t want to loan money for more than five years. 

Benefits of a Gift and Loan Trust

Several benefits stem from establishing a Gift and Loan Trust. More specifically: 

• You can receive regular or ad-hoc payments in the form of loan repayments 
• Your investment bonds and growth are free from Inheritance Tax 
• You have greater flexibility over how and when to withdraw funds  
• You can establish this Trust with a spouse or civil partner 
• You can modify the beneficiaries if you opt for the discretionary Trust

Risks to consider

As with any type of tax or estate planning, there are several risks that you should consider before deciding to establish a Gift and Loan Trust.

More notably, if an investment is put into the Trust and the value decreases rather than increases, you may be left with less than you originally invested.

Although tax rules have set rules and ‘brackets’, they may change if money from your estate is gifted before you die. However, for a gift to be made, your capital must be withdrawn from the Trust. 

For a more comprehensive understanding of the potential risks, you should reach out to a professional financial advisor.

FAQs

What happens when I die? 

When you pass away, any loan is repaid to the Trust. Depending on the guidelines and/or purpose of the Trust, existing capital can be distributed to your Beneficiaries or left in the Trust. However, if you have established the Trust with another individual, the Gift and Loan Trust will remain operational until the last assured life passes away.   

How can I use these to minimise my Inheritance Tax liability?

A Gift and Loan Trust can minimise liabilities because the investment growth from the Trust does not incur an immediate IHT charge. Although the growth of your investments remains untouched, the unpaid balance of the loan may incur some form of IHT impact.  

How many Trustees  are needed?

A minimum of two personal Trustees  or one corporate Trustee is needed to create a Gift and Loan Trust. 

Can I change the beneficiary?

Depending on the type of Trust you select, you may, or may not, make changes regarding your beneficiary.

If you select a bare version of the Trust, you cannot modify the beneficiary. However, if you opt for a discretionary version of the Trust, Trustees  will choose who benefits after your death, when they receive the funds, and how much they are entitled to (if the structure of the Trust permits this). 

Although you can make your choice known before passing, it is ultimately up to the Trustees .

Can I add or remove a Trustee?

No, you cannot remove a Trustee. However, if your Trustee asks to be discharged, refuses to participate, is no longer capable of performing their responsibilities, or dies, you can appoint a new Trustee in their absence. 

What happens if I decide I don’t need the loan back?

Simply inform your Trustees  that you no longer require loan repayments and convert the outstanding balance into a gift. However, once you make this decision, you will no longer be able to withdraw funds from the Trust.

Final thoughts

Overall, Gift and Loan Trusts are an excellent way to make the most of Inheritance Tax planning without compromising your financial security. Rather than making a gift to loved ones in full, you can still have access to your funds over the years. Furthermore, you can have more control over how your Beneficiaries spend their inheritance. 

If you place investments into the Trust they can grow in an interest-free environment, which is separate from your estate, allowing you to maximise your potential financial opportunities. However, you’ll still be able to access your funds through regular or ad hoc payments.

The Gift and Loan Trust gives you the best of both worlds: you can leave a gift behind for loved ones and benefit from a financial security net simultaneously.  

If you still need advice regarding the Gift and Loan Trust, Efficient Portfolio works with a wealth of professionals who will be able to advise you further on the matter. Contact us today.