Inheritance tax planning can be complex, but there are ways of reducing your liability and still drawing an income from the money. The loan trust is one means of doing this.
For the ethical investor, just as for the regular one, growth of your assets is a key aim – whatever good you can do along the way. However, there are circumstances where growth can cause problems further down the line. Inheritance tax planning may be required if the size of your estate is approaching the threshold, since further appreciation will mean you incur a liability of 40 percent of everything above this amount. Gifting is one way to reduce the size of your estate, but you may be unwilling to do this; although you may not need that capital now, you may want to have access to it at a future date.
The loan trust is one area of inheritance tax planning that can work well in these circumstances. Whilst it does not reduce the size of your estate (in the way that gifting within the rules does, whether before or after death), it does mean that any growth in the assets placed within the trust is not considered part of your estate on death. Not only this, but you can continue to draw an income from the loan trust. This is a good compromise for people who do not want to pay additional inheritance tax may need access to the funds at some point in the future.
Say, for example, that your estate is now valued above the IHT threshold (currently £650,000 for a married couple). Rising property prices mean that this is far more common than it used to be. Careful inheritance tax planning will mean that you do not have to pay anything extra on death if your estate grows further. A loan trust is essentially an interest-free loan from your estate into the trust. The loan is repayable on demand (meaning that you always have access to it). You can also require regular repayments, which can act as an income from the trust. However, set against the possibility to do this you have to consider the impact on the growth of the loan – drawing money regularly could limit this.
The money in the loan trust can be invested as it would be in normal circumstances. For the ethical investor, this still gives the opportunity to invest in sustainable or other ethical businesses and have your money work in the way you want it to, only without incurring the taxes on death that you usually would. Assume that you (the settlor of the loan) set aside a sum of £100,000, and the trustees (who would usually be the settlor and their spouse, and perhaps beneficiaries of your estate) receive a repayment of this loan of £10,000 per year. Careful inheritance tax planning means that on death, only the amount of capital left from the loan would be liable for tax.
So, if death occurs five years after the loan was made, and £10,000 has been repaid every year, £50,000 is left on the capital amount and inheritance tax is payable on this if it is above the IHT threshold. But shrewd inheritance tax planning means that any growth in the loan due to return from your investments is not subject to IHT. If the investments have made a return of £30,000 and the total value of the loan is therefore £80,000, you are still liable for tax only on the £50,000 remaining from the original loan.
Inheritance tax planning by means of a loan trust can therefore be an effective way of limiting your IHT exposure in the event of your estate growing further, whilst at the same time retaining access to the money should you need it. However, this is a complex area of inheritance tax and should be considered with an independent financial adviser in conjunction with the other options available to you.
This article was supplied by Norwich based financial advice specialists, SGWealthManagement.co.uk who are registered with the FSA and serve individuals and organisations throughout Norfolk, East Anglia and the south-east.