A loan trust can be a great way to commence estate planning for those clients who may not be comfortable about gifting away capital in case they may need it at some point in the future. Advisers should know the benefits of using loan trusts and how they work, so they can understand where they can fit into effective estate planning.

This module should take around 90 minutes to complete. Once you have completed all the sections there is a short self-assessment quiz to check what you have learned and a CPD certificate for up to 90 minutes can be claimed.


On completion of this module you should be able to:

  1. Determine the IHT impact on a settlor’s estate from using a loan trust including any outstanding loan
  2. Explain how a loan trust is created and why bonds are often used as the preferred trustee investment option
  3. Describe the options for dealing with any outstanding loan on the settlor’s death

Post learning assessment

Question 1

Cecil paid £200,000 into a discretionary loan trust, which was invested into an offshore bond. So far Cecil has only taken £10,000 from the bond, which is now valued at £275,000. Which statement is true about Cecil’s IHT position?

  1. The full bond value (£275,000) falls outside his estate.
  2. The full bond value (£275,000) plus previous withdrawals (£10,000) would be added to his estate.
  3. The full loan value (£200,000) is outside his estate.
  4. The outstanding loan value (£190,000) is included in his estate.

Question 2

Which of the following is NOT an advantage to the trustees of a loan trust using an investment bond?

  1. The 5% tax deferred withdrawals can be used to make loan repayments without creating a tax charge.
  2. As bonds don’t produce income, trustees won’t have this to distribute to beneficiaries with income rights.
  3. Trustees won’t have any tax reporting responsibilities until a chargeable gain occurs.
  4. A settlor’s request for an ad-hoc loan repayment above any unused 5% tax deferred allowance will be subject to income tax.

Question 3

Eight years before his death Max took out a discretionary loan trust for £400,000. During his lifetime he received loan repayments of £150,000. His will contains a clause waving the right to the outstanding loan in favour of the trust. On death the bond is worth £430,000. Which of the following statements is incorrect?

  1. The trustees do not need to repay the loan to the estate.
  2. The outstanding loan of £250,000 is still included in Max’s estate for IHT.
  3. The trust was created more than 7 years ago so is not included in his estate for IHT.
  4. The investment growth of £30,000 and loan repayments of £150,000 are outside the estate for IHT.

Check your answers

Claim your certificate

Any reference to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.