The Loan Scheme allows a person (the donor/settlor) to make an interest free loan to a trust, which is invested in a bond. Any future potential growth on that investment will not form part of that person's estate for inheritance tax (IHT) purposes. The person can demand repayment of the loan, in whole or in part, at any time.
- It provides a potential reduction in the value of the donor/settlor’s estate for IHT purposes.
- There are no IHT charges in setting up the trust.
- Any growth on the investment is immediately outside of the donor/settlor’s estate for IHT purposes but the outstanding balance of the loan remains part of their estate.
- It gives the donor/settlor the right to demand repayment of the loan at any time.
- Repayment of the loan can be made by regular or ad-hoc payments.
- Enables the donor/settlor to take regular payments of up to 5% a year of the original amount of the loan without any immediate liability to income tax.
- After the donor/settlor’s death, the trust fund will be held for the benefit of the people named as beneficiaries of the trust, subject to the repayment of any outstanding loan to the donor/settlor’s estate.
- The bond can pay ongoing adviser fees. However, any ongoing adviser charges taken from the bond will count towards the 5% tax deferred allowance. Anything taken over any accrued allowance in any policy year will result in a gain and income tax may be due.
The value of the bond held within the trust, and any income taken from it, can fall as well as rise and your clients, or their beneficiaries, may get back less than the client invested.