Inheritance Tax
Gift and Loan Schemes - and Inheritance Tax Avoidance
Gift and Loan Schemes, which are also known as Loan Schemes, are a popular way of reducing your Inheritance Tax liability without losing access to the capital. How it works:-
- You establish a trust, and loan the trust money
- The trustees invest this in an insurance company bond
- You reserve the right to have the loan paid back in full, or have partial repayments
- Any growth on the bond falls outside of the value of the estate on death
- The amount of loan not repaid on death forms part of the deceased's estate
- The main advantage is that it puts further growth on money outside of the estate
Below shows how the scheme would work, one based on taking repayments to use as income, and one with no repayments of the loan. It assumes that the £100,000 grows over five years to £150,000.
| No Loan | Loan Scheme but no repayments | Loan Scheme but with repayments at £5,000 p.a. |
Original Investment | £100,000 | £100,000 | £100,000 |
Original Investment & Growth after 5 years | £150,000 | £150,000 | £140,000 1 |
Repayments made | n/a | n/a | £25,000 |
Loan amount outstanding and potentially liable to IHT | n/a | £100,000 | £75,000 |
Amount which escapes IHT | £0 | £50,000 | £65,000 |
Amount potentially liable to IHT | £150,000 | £100,000 | £75,000 |
Maximum amount of IHT | £60,000 | £40,000 | £30,000 |
1 Please note the amount of growth after five years is only £140,000 as this assumes £5,000 of the fund has been taken out and used as income.
A Gift and Loan Scheme (or Loan Scheme) is generally suitable for people who want to retain access to their capital, but do not want to their estate to increase in value any further.
These are just two of the methods available to reduce your Inheritance Tax liability. There are other strategies. If you want to know more, and how we can help then contact us now.
