Inheritance Tax: Is a Loan Trust a wise option?

Cammie50

Following on from my previous post, I am currently looking at investing for the first time. In summary, I have recently retired with 2 pensions which are adequate for my needs, so I don’t need an income. I also have a lump sum of around £350K which is currently spread between NS&I, cash ISAs and bank accounts. I understand that it would be wise for me to now invest. Thanks to previous advice on this forum, I am meeting with several IFAs to discuss my options. 

At today’s values, my current IHT liability is around £50K. I have been advised to plan ahead regarding this and a Loan Trust has been suggested as part of my Investment portfolio. My understanding is that a large part of my lump sum (£200K) would be put into a Loan Trust and then invested by the Trust. I would have access to the capital if I needed it but not the growth. The growth would not form part of my estate but any remaining capital would so the IFA recommended taking out 4% per annum (£8,000) and either gift it, spend it, or a combination of both. I also understand that the loan could be waived at any time by me, if I did not need to draw from it. 

The remainder of the lump sum would be split between Premium Bonds and an S&S ISA. 

Does this look like a sensible way to go or not? Any sound advice would be appreciated. 

Malthusian

This doesn't seem to meet your desire for "nothing complex" expressed in a previous thread.

The suitability of this kind of arrangement may be a bit beyond people-down-the-pub advice.

Have you considered just giving the money to your intended beneficiaries?

pip895

After having been on the receiving end of a trust my father set up to save IHT I would suggest keeping things simple.  Gift some of the money now then make full use of yearly gift allowances and gifting out of excess income, going forward.  

dunstonh

Over the years I have unwound more trusts set up by others with good intentions but flawed ideas than I have set up trusts.  It is more complicated and often unnecessary.    

Pay more into your own pensions if you can (outside of the estate) - £3600 may not be much but cumulatively each year it adds up. If you are married you do both of you and it doubles up.  10 years of £3600x2 = £72,000 plus growth outside of your estate.

Gift the money to the intended beneficiary(ies) now (or annually).   If you dont want them to spend it now then insist it goes into their pension.     

Those are just two simpler alternatives that may be available.

The growth would not form part of my estate but any remaining capital would so the IFA recommended taking out 4% per annum (£8,000) 

That is unlikely to be the best option.

The 4% figure suggests an onshore/offshore bond is being used.  You are allowed to draw 5% a year on these.  However, for modern plans, the ongoing adviser charge comes off that 5% (older plans it doesn't).  This indicates a 1% charge which reduces the ability to draw (and reduces the growth).   You would be better paying the adviser fee from personal funds retained within your estate as the plan is to reduce the estate. Not reduce the money you have put to one side to get it out of the estate.

Offshore bonds and trusts have a more complicated tax arrangement and you need to be careful you don't trigger tax unnecessarily.  Some people have found themselves with big tax bills by making mistakes.   An offshore bond in trust is not something you would call uncomplicated.

Albermarle

Also consider if your estate did have to pay some IHT , would it really be that bad . Tax is just part of life , and death.

Cammie50

Thank you all for the above suggestions. It’s really helpful to hear your views. I just want to make things as good as I can for my dependants… but in the simplest and least complicated way. It would seem that a Loan Trust may not be the way to go. Back to the drawing board…

Malthusian

The simplest ways of improving your dependents' lives are, in decreasing order of simplicity:

1) Give them the money

2) Spend it for their benefit (retains control, but needs them to want something)

3) Keep it until you die and it is transferred to them (potentially means 40% of the excess over your nil rate bands goes to the Government)

4) Keep it until you die and invest some of it in IHT-relieved assets (unlikely to be suitable as you are a first-time investor, and all such investments are extreme high risk)

5) For under-55s, pay into their pensions. (An overrated option, in my opinion, but worth mentioning as it is the only option to transfer money to a compos mentis adult specifically for their benefit, which is effective immediately for IHT purposes, but does not give them immediate access. If they are over 55 it's the same as option 1.)

6) Anything involving trusts, loans, and anything you would struggle to explain to the beneficiaries at a family meal in the time between ordering and the starters being served.

Cammie50

Thank you Malthusian. Much appreciated. It would seem that in a nutshell, the advice would be to keep it simple. Perhaps I’m getting too focused on trying to avoid/reduce IHT for the benefit of my beneficiaries, but as dunstonh said:

Over the years I have unwound more trusts set up by others with good intentions but flawed ideas than I have set up trusts.  It is more complicated and often unnecessary.  

Alexland

Malthusian said:

4) Keep it until you die and invest some of it in IHT-relieved assets (unlikely to be suitable as you are a first-time investor, and all such investments are extreme high risk)

Diversification can dilute the 'extreme' from the 'high risk' with a good mix of qualifying AIM assets using a portfolio service from Octopus etc. Still high risk, the charges won't be attractive but a very good chance of a positive return over the medium to long term and can be held in an ISA wrapper.

https://octopusinvestments.com/our-products/business-property-relief/octopus-aim-inheritance-tax-isa/

Cammie50

Thank you Alexland. As mentioned in my previous post, I’m new to Investing. Lump sum is currently in NS&I and various bank accounts. Don’t need to increase my income as I have good pensions but would like to invest in something that would create perhaps a monthly income that I could pass over to my daughter, who needs it. Would this be considered as “gift from unused income” or would there be tax implications for me? I’m currently a basic rate tax payer. 

Alexland

Cammie50 said:

Thank you Alexland. As mentioned in my previous post, I’m new to Investing. Lump sum is currently in NS&I and various bank accounts. Don’t need to increase my income as I have good pensions but would like to invest in something that would create perhaps a monthly income that I could pass over to my daughter, who needs it. Would this be considered as “gift from unused income” or would there be tax implications for me? I’m currently a basic rate tax payer. 

The average dividend yield for companies in the Octopus AIM ISA is only 1.24% and their ongoing charges are higher at 1.5%+vat for advised clients and 2%+vat for non-advised clients so realistically it's not designed for income. Still the portfolio has a 10 year growth record of 238% which is comparable with a low cost global tracker fund. Market conditions won't always be as positive as the last decade but if you can cope with the price volatility (you were going to lose 40% to the tax man anyway if you didn't use pension, spending or gifting) it might be something to consider for some of your money. Obviously the investments need to be held at least 2 years to qualify and if they make changes to the portfolio that would start the clock again on any new investments they might make. It might be worth getting some independent advice.