Features and benefits
- Access original capital: your client can access the original capital sum at any time, either as a full lump sum, occasional sum or regular repayments of the loan, addressing any concerns about unforeseen circumstances.
- Capital growth: any growth on the investment is part of the trust and therefore will not further increase the size of your client’s estate.
- Four product choices: The Prudential Investment Plan, Prudential International Investment Bond, Prudential International Investment Portfolio and the Prudential Onshore Portfolio Bond.
- Probate: your client can choose for the loan to be waived on death, meaning that the trustees can access the money immediately.
Please remember that the value of your client’s investment is not guaranteed and can go down as well as up. The outstanding loan may not be repaid in full.
About the Loan Trust
The Loan Trust offers your client an alternative to giving away capital for good – it allows access to capital but any growth won’t further increase the estate.
Your client sets up the trust by appointing trustees, of which your client is one, and making an interest-free loan to them of the capital they wish to invest. This loan is interest free and repayable on demand.
The Loan Trust will not normally create any immediate Inheritance Tax charge although any outstanding loan remains part of your client's estate for Inheritance Tax purposes.
The trustees invest the loan in one or more of the single premium investment bonds on offer. Any growth on the capital is held outside of your client’s estate.
Your client can demand the balance of the outstanding loan at any time they need it – either as a lump sum, occasional sum or regular payments. Repayments are funded by the trustees taking withdrawals from the bond. Each withdrawal is a partial repayment of the original loan.
Withdrawals can continue until the loan has been repaid to your client in full. Your client can receive up to 5% each year of the amount invested into the bond without creating an immediate Income Tax liability.
The loan can be waived in part or full at any time, which will create a Potentially Exempt Transfer (PET) or Chargeable Lifetime Transfer (CLT) for any amounts not exempt.
How the Loan Trust works
Choice of products
Trustees can choose at least one of the following four products.
The Prudential Investment Plan offers a wide range of funds and flexible charging options.
The Prudential Onshore Portfolio Bond is available on a number of investment platforms and offers access to the range of assets available on the selected platform.
Prudential International Investment Bond also offers a choice of unit-linked funds, including Prudential Assurance Company (PAC) With-Profits Funds.
Prudential International Investment Portfolio gives you the choice of a wide range of investments, including unit trusts, investment trusts and OEICs, from an extensive list of fund managers.
Choice of trust
The Loan Trust offers a choice of trust - Absolute or Discretionary - so your client can decide which better suits their circumstances.
Your client must select the beneficiaries and their share of the trust fund when setting up the trust. May be suitable if your client is sure of how they would like trust assets to be distributed.
Trustees have the discretion to make distributions to anyone from a wide class of beneficiaries. May be suitable if your client is unsure who they would like trust assets to be distributed to.
For information on the types of trust available, download A guide to the Loan Trust (PDF).
How is a trustee held bond taxed?
The trustees can withdraw up to 5% of the original investment each year without any immediate tax liability.
On surrender or part surrender of the bond a chargeable gain arises which could trigger an Income Tax liability. Where a UK bond is used the gain is accompanied with a tax credit which satisfies the basic rate tax liability.
Who pays the Income Tax?
This depends on which type of trust your client has chosen.
The gain is treated as income of the beneficiaries and taxed at their highest marginal rate. Where a UK bond is used the gain is accompanied with a tax credit which satisfies the basic rate tax liability.
If the settlors are alive and resident in the UK when an Income Tax liability arises, or it occurs in the tax year in which they die, the gain is treated as income of the settlors and taxed at their highest marginal rate. They may recover the tax from the trustees.
If it arises after their death (other than in the tax year in which they die), or when they are not resident in the UK, the tax charge will be assessed against UK resident trustees at the additional rate of tax for individuals.
In either case, where a UK bond is used the gain is accompanied with a tax credit which satisfies the basic rate tax liability.
The impact of taxation (and any tax reliefs) depends on your client’s individual circumstances.
The information is based on our understanding, of current taxation, legislation and HM Revenue & Customs practice, all of which are liable to change without notice.