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The Planning and Practicalities of Loan Trusts

Session: 5 November 2020

The Loan Trust has been a long established feature of the Inheritance Tax (IHT) and Estate Planning landscape. The Loan Trust isn't the most IHT efficient of your standard insurance companies trusts.

But it's operation and flexibility means it's an essential part of the financial planners toolkit. It's a useful solution for everything from probate planning to having your client's make that first step to giving some of their money away. 

This session should help you gain an understanding of: 

  • Why you would consider a Loan Trust 
  • How Loan Trusts work 
  • The practicalities of writing and administering loan trust business 
  • Planning considerations when recommending a loan trust

Presenter – Barrie Dawson - Technical Manager

Test your knowledge

1. It’s only withdrawals taken from the insurance bond to repay the outstanding loan to the settlor that count towards the 5% tax deferred allowance on the bond. 

    a) True 

    b) False

2. John sets up a loan trust for £100,000 but sadly dies within seven years.  He received loan repayments of £23,600 which he spent.  The bond was valued at £105,000 when he died.  In relation to the loan trust what value is included in his estate for inheritance tax purposes? 

    a) 28,600 

    b) £128,600 

    c) £100,000 

    d) £76,400 

3. Harry sets up a discretionary loan trust for £200,000.  He doesn’t take any loan repayments and after seven years he decides to waive the entire loan.  Which of the following statements is true? 

    a) Waiving the loan is a Potentially Exempt Transfer (PET) 

    b) Waiving the loan is a Chargeable Lifetime Transfer (CLT) 

    c) Waiving the loan is not a PET or CLT because it’s a loan trust 

    d) Waiving the loan is not a PET or CLT because it was waived after seven years

4. Sue set up an absolute loan trust for £150,000 then later topped up the bond with a gift of £50,000.  Her two grandchildren are equal beneficiaries.  Withdrawals of £30,000 have been taken to pay ongoing adviser fees and £20,000 loan repayments.  The bond is now worth £400,000.   The trustees have established there would be no tax due if the bond is surrendered.  If the trust is wound up how much of a loan repayment will Sue receive and how much will each grandchild receive?

    a) Sue will receive £180,000 and each grandchild will receive £110,000 

    b) Sue will receive £170,000 and each grandchild will receive £115,000 

    c) Sue will receive £130,000 and each grandchild will receive £135,000 

    d) Sue will receive £120,000 and each grandchild will receive £140,000

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