A gift and loan trust is a type of estate planning strategy that allows you to reduce your inheritance tax liability while retaining access to your money. It involves making a small gift of £10 to a trust and then lending a large sum of money to the trustees on an interest-free basis. The trustees use the loan to invest in an asset, such as a single premium bond, that generates growth for the beneficiaries of the trust. You can withdraw part or all of the loan at any time, but any growth on the asset is outside of your estate for inheritance tax purposes. You can also waive part or all of the loan to further reduce your estate value. A gift and loan trust can be set up as a bare trust or a discretionary trust, depending on whether you want to change the beneficiaries or not.
A bare discretionary trust is a type of trust where the trustees have the power to decide how to distribute the trust income and capital among a group of potential beneficiaries. The beneficiaries do not have any fixed entitlement or interest in the trust assets until the trustees exercise their discretion in their favour. A bare discretionary trust can be useful for estate planning purposes, as it allows the settlor to provide for a range of beneficiaries without giving them direct access to the trust assets. The settlor can also give guidance to the trustees on how they would like them to exercise their discretion, by writing a letter of wishes.
A bare discretionary trust is different from a standard discretionary trust in that it is treated as a bare trust for inheritance tax purposes. This means that any gifts into the trust are potentially exempt transfers, and will not be subject to inheritance tax if the settlor survives for seven years after making the gift. However, this also means that the trust assets will form part of the beneficiary's estate when they receive them, and may be subject to inheritance tax on their death. A bare discretionary trust is also different from a standard bare trust in that it does not give the beneficiary an absolute right to the trust assets at age 18 (or 16 in Scotland), and the trustees can retain control over the distribution of the assets until they decide otherwise.
A bare loan trust is a type of trust where the settlor lends money to the trustees, who then invest it on behalf of the beneficiary. The beneficiary has an absolute right to the capital and income of the trust at any time, as long as they are 18 or over (in England and Wales), or 16 or over (in Scotland). The settlor can receive regular repayments of the loan from the trustees, which are not subject to tax. The main advantage of a bare loan trust is that it can reduce the inheritance tax liability of the settlor, as the value of the loan is deducted from their estate. However, the beneficiary will be liable for any tax on the growth and income of the trust assets .