Inheritance tax planning is all about striking a balance between the needs of today and those of tomorrow. There are a range of options available to help reduce the tax liability on your estate and your particular circumstances will help determine which of these choices is best for you.
One solution is the loan trust, which leaves you with access to your investments at today’s value, but puts future growth outside the reach of inheritance tax.
A loan trust can be used to hold a portfolio of environmental and ethical investments that generate income. This income remains within the trust, where it’s protected from inheritance tax, while the original capital can be withdrawn as required.
How a loan trust operates
As its name implies, a loan trust is based on a loan. A trust is created to which you make an interest-free loan. This capital remains part of your estate and could be liable for Inheritance Tax at 40% if your estate is valued above the applicable threshold. At present these are £325,000 for an individual or £650,000 for a married or civil partnership couple.
The capital can be invested in any way you choose, including ethical or environmental funds. You will have your own views and principles for investment, and can act in accordance with these. Whether you’re concerned about climate change, protecting endangered species or promoting sustainable development, you’ll be free to invest in these different areas as you choose.
You will also be looking for a return on that investment, and this return will also be held by the trust. But unlike the capital, it will not be potentially liable for inheritance tax, because the capital growth stays in the trust and is not part of your estate.
You are free to take an income from the trust by withdrawing some of the original capital as often as you like. Over time, this will reduce the amount that could be taxable.
Who could benefit from a loan trust?
A loan trust can work to your advantage if you have capital on which inheritance tax may be liable but which you need to be able to access, probably to draw an income.
Because the capital is only loaned to the trust, you can have some or all of it back as you require it. But the income that your investments generate must stay within the trust to keep it outside of your estate.
It’s a flexible solution which has the benefit of allowing you to make socially responsible investments while minimising you estate’s exposure to inheritance tax.
This article was supplied by Barchester Green Investment, the UKs longest established FSA-regulated independent financial adviser (IFA) specializing in ethical investment.