Guide to Essential Money Tools

Tax Tools

Inheritance tax planning tool

Bank of Scotland Investment Service launches a planning tool now that IHT applies to more than 10% of UK estates.

The continued growth in property values means tens of thousands more Brits face hefty inheritance tax bills. And recent Budget changes have made it more difficult to plan for inheritance tax using traditional trust vehicles.

Bank of Scotland’s Loan Trust offers a new opportunity to those families whose primary concern is to protect their assets for future generations.

As Bank of Scotland Head of Wealth Management Chris Haines points out, “Substantial outright gifts are not always desirable or possible as the donor may require access to the gift capital. So this trust can be an effective solution as it enables inheritance tax savings over time while allowing for continued access to the original capital.”

Mr Haines explains further, “This financial planning tool involves setting up a Loan Trust for chosen beneficiaries (excluding yourself or your spouse or civil partner).

“You make a loan to the trustees which they place in an investment bond. The loan is interest free but is repayable on demand under a binding legal obligation. You, therefore, always have access to your capital.

“Any growth on the investment is held outside the estate for the trust beneficiaries. The outstanding loan will remain as an asset of your estate and so potentially be subject to inheritance tax on your death but the loan, and the inheritance tax liability, is reduced as you take repayments on the loan for use as income. You have effectively frozen the inheritance tax liability of your investment at its current value.”

Example
Mr T, age 70, establishes a Loan Trust with a loan of £200,000. The trustees repay the loan in annual installments of £10,000 which Mr T uses to supplement his pension income. No immediate liability to income tax arises as the amounts withdrawn from the investment bond are within the 5 per cent allowable limit (a tax concession of investment bonds).

In the event of Mr T’s death, say at age 89, only £10,000 of the original investment remains in his taxable estate. Mr T had the benefit of a tax-efficient income for his retirement and assuming a 6% pa interest and allowing for charges and expenses, investment growth of £220,000 is held outside his estate and is available to the trust beneficiaries.

The Loan Trust could be suitable for people in the following circumstances:

• the estate is liable to inheritance tax on their death.
• they are unable or unwilling to make outright gifts as they may require current or future access to their original  capital on either a regular or ad hoc basis.
• they have a lump sum available for investment.
• they are willing to forego access themselves to any future growth on the amount invested.
• they are willing to make a decision now on who should benefit from any future growth on the amount invested.