For those with available capital, a desire to do some-thing about inheritance tax but a need to retain control over and access to that capital, the retail financial services sector developed a wide range of solutions.
In many cases, these solutions were founded on a combination of a UK or offshore single-premium whole of life assurance.
Of late, some solutions based on collectives have also started to emerge. The key taxpayer determinants of which plan or combination of plans might be most appropriate would include the extent to which the would-be planner required access to, and control over, the amount to be invested. And then, what sort of access? To a regular income or capital, or both?
Any solution developed to meet any one or combination of those needs had, of course, to avoid the gift with reservation and pre-owned asset tax provisions.
One of the most flexible solutions, delivering continued access to the amount originally invested while ensuring that all investment growth accrues to the trustees and not the investor, is the loan trust.
This would usually be founded on a flexible interest in possession or discretionary trust. In many cases, the trust will have been established by a declaration of trust followed by an interest-free loan, repayable on demand, to the trustees to invest.
There would be no initial chargeable transfer and no initial value attributed to the trust property.
At the time of the periodic charge, the outstanding loan would be deducted when determining the value of the trust property for the purposes of determining the amount of any charge. For more substantial plans, it may be worth establishing a series of trusts on different days so as to access more than one nil-rate band for the overall arrangement.
As stated above, one of the main benefits of a loan trust is its inherent flexibility. If founded on a flexible or discretionary trust, it will give the settlor or trustees the power to change beneficiaries.
Most importantly (when compared with other forms of retail investment-based IHT planning), it will enable the lender to have back the whole of their original investment (less any amounts of the loan already repaid) at any time.
As also stated above, the growth on the amount invested by the trustees will accrue to the trust and the lender’s estate will effectively be frozen at the amount of the loan. The lender’s estate will then be reduced to the extent that loan repayments are taken and spent.
Like all estate planning, though, starting with an individual’s will, loan trusts need to be kept under review.
Most advisers will welcome the opportunity for regular communication with what is likely to be a key client category…those with an estate planning concern who had the wherewithal and desire to do something about it.
Where that “something” was a loan plan, what could have changed over the last year?
1: The lender’s need for capital from the trust – it could have increased or decreased.
2: The lender may want to write off the loan.
3: The trustees may want to change the underlying investment(s).
4: The settlor/trustees may want to change the beneficiary(ies).
Can all or any of these needs/aspirations be satisfied? Substantially, yes.
1: To the extent that there is an outstanding loan, the repayments can be varied in amount and frequency without inheritance tax consequences. The loan would, after all, typically, be repayable on demand.
2: If the lender no longer needs access to all or any of the outstanding loan (or part of it) the loan can be written off. This would constitute a disposal for IHT purposes and, depending on the nature of the trust, this would be either a potentially exempt transfer (bare trust) or chargeable transfer (discretionary trust).
If the loan repayment was taken and then gifted, the gift would be a potentially exempt or chargeable transfer as appropriate.
3: Under most loan trusts, the trustees would have a wide power of investment. The trust provisions would need to be checked and satisfaction secured on the investment and tax appropriateness of disinvesting and reinvesting. Neither of these issues can be taken lightly and advice would be absolutely essential.
4: Provided the trust is a flexible trust and provided an irrevocable appointment had not been made, then it should be perfectly possible to change “default” or “named” beneficiaries.
Where the trust is a discretionary trust, then no beneficiary will have a current right to benefit, although there is likely to be one or more persons specified as the ultimate default beneficiary(ies).
In this case, all that may be necessary is for a non-binding nomination to be made to the trustees – a simple non-binding indication of wishes.
If there is certainty over who should benefit, then an irrevocable appointment of benefit could be made. The route adopted will depend on the circumstances and the terms of the trust.