Technical Helpline Questions – Loan Trusts

Here are some of the common questions the Technical Helpline is asked about loan trusts

Q1. Can you top up a loan trust?

A1. Yes, most trusts will allow the settlor to add money to the trust fund and the loan trust is no different. The settlor just has to decide if they want to add the money as an additional loan or as a gift.

Q2. How would the settlor lend more money to the trust?

A2. Usually the settlor will document this by completing an additional loan agreement form. The settlor can provide the trustees with a further sum of money. The trustees then apply for either a top-up on an existing bond or a new bond with the money they have been loaned. Sometimes, the provider will accept a cheque directly from the settlor. The additional loan gives the settlor access to the extra capital and they can call on this to be repaid at any time. This is not a transfer of value for IHT purposes as it is a loan.

Q3. How can the settlor gift additional money to the trust?

A3. The settlor can provide the trustees with a further sum of money with the instruction that this is a gift into the trust fund. The trustees then apply for either a top-up on an existing bond or a new bond with the money gifted. Again, sometimes the provider will accept a cheque directly from the settlor. This would usually be accompanied by a letter stating that the money is an additional gift into the trust fund. This money is for the benefit of the beneficiaries; the settlor has no right to it.

Q4. What is the IHT position if the settlor gifts additional money to the trust?

A4. This depends on the type of trust. It will either be a potentially exempt transfer (PET) under an absolute/bare trust or a chargeable lifetime transfer (CLT) under a discretionary trust.

Q5. Can you put an existing bond into a loan trust?

A5. Generally a loan trust cannot be established using an existing bond. Assets, such as existing bonds, can be added to an existing loan trust but, as these are not 'cash' assets, they could not be classed as a loan from the settlor. As such, it would normally be a transfer of value for IHT purposes and the settlor would not have any rights over it.

Q6. Where can I find more information about a loan trust?

A6. On our Technical Centre, here – http://www.pruadviser.co.uk/content/knowledge/technical-centre/loan_trust/