Contents

• What are loan plan trusts?
• What access does the settlor have to the loan plan trust?
• Waiving the loan
• What access do the beneficiaries have to the loan plan trust?
• What happens to the loan plan trust when the settlor dies?
   

What are loan plan trusts?

These trusts are used by individuals who are looking to carry out inheritance tax (IHT) planning, whilst retaining a right to their original capital. 

The settlor lends money to the trustees who invest this into a single premium investment bond. Using a loan plan trust allows individuals access to their original capital – the loan amount, and this will be the amount used to set up the investment bond. The loan is interest free and repayable on demand at any point and in any amount.

Some providers may allow for the loan plan trust to be topped with a further loan to the trustees or a gift into the trust for the benefit of the trust beneficiaries.

As the settlor is lending money to the trustees (not gifting) this is not a transfer of value for IHT purposes, so it is not a PET or a CLT. The growth on the investment is outside of the estate for IHT purposes.

The trust may be subject to periodic and exit charges if set up on a discretionary basis. When the trust fund is being valued for the periodic/10 yearly charge the assets within the trust less the value of the outstanding loan is used for this for this calculation.
 

What access does the settlor have to the loan plan trust?

The settlor can request repayment of some or all of the loan at any time.

Normally, the settlor receives repayments of the loan by utilising the 5% tax deferred withdrawals as an income. Once the loan has been fully repaid no more regular withdrawals can be taken by the settlor. 

In a joint settlor case, the right to repayment of the loan will automatically pass to the surviving settlor.

If a discretionary trust version of the loan plan has been used, repayments of the loan will not be assessable as an exit charge from the trust, as these are going to the settlor and not the beneficiaries of the trust.
 

Waiving the loan

The settlor can waive the loan in full or part, depending on the terms of the trust (which may differ from provider to provider). The loan is waived by the settlor completing a deed of waiver. By waiving the loan, the settlor is giving up their right to the repayment of the loan. This will be a gift for IHT purposes from the date of signing the deed. 

If it is an absolute trust, the amount waived (if not exempt) creates a PET, which after seven years from the date of the deed of waiver becomes exempt from inheritance tax. If the settlor dies within the seven years, the PET becomes chargeable.

If it is a discretionary trust, the amount waived creates a CLT. There may be an entry charge if the value of the waived amount when added to any other CLTs made in the previous seven years exceeds the settlor’s the nil rate band, currently £325,000.
 

What access do the beneficiaries have to the loan plan trust?

All the growth of the loan amount invested, and any amounts waived is held for the benefit of the beneficiaries. Some providers may allow payments to be paid to the beneficiaries when some or all of the loan is outstanding. However, the trustees should consider the interests of the settlor and their right to repayment or any outstanding loan before making any payments to the beneficiaries.

Payments from the trust to discretionary beneficiaries will be assessable as an exit charge for IHT.
 

What happens to the loan plan when the settlor dies?

The loan plan is made up of 2 distinct elements, the loan, and the trust fund.

1. The loan

The loan granted by the settlor to the trustees is an asset of their estate and any outstanding loan will form part of the settlor’s estate for IHT purposes. Generally, the loan will be paid to the estate when the settlor dies.

To ensure the trustees do not have to cash in the investment to repay the settlor’s estate, the settlor can consider adding a codicil to their Will, confirming who they want the loan left to when they die.

This could include leaving any outstanding loan to the trustees of the loan trust, to be held for the benefit of the trust beneficiaries. This may not change the settlor’s IHT position but will give the trustees some flexibility on controlling when a chargeable event may occur and who it will be assessed on. This can also avoid the trustees being taxable on higher trustee rates of tax, e.g. in the tax year after the tax year of the settlor’s death the trustees will be liable to tax on any gain at 45%.

If the Will is silent on the loan amount, the executors can choose to recall the loan from the trustees of the trust (which may mean that the bond must be surrendered); or pass the outstanding loan to one of the beneficiaries of the Will, who can step into the shoes of the settlor and demand repayment from the trustees in the same way.

Some providers loan plans may give the settlor the option to elect for the outstanding loan to form part of the trust fund on their death when they set-up the loan plan. The benefit of this is that the settlor does not need to include any provisions concerning any outstanding loan, in their Will or codicil.

2. The trust fund

This includes the trust assets, including any growth on the loan, but not including any outstanding loan. It is held by the trustees for the benefit of the beneficiaries.

The trustees can choose to keep the investment bond, or they may choose to fully surrender the bond. Retaining the investment in the bond will give the trustees flexibility on controlling when a chargeable event may occur and who it will be assessed on, which may be more tax advantageous than fully surrendering the bond immediately after the death of the settlor.