Loan Trust

• Access original capital: your client can access the original capital sum at any time, either as a full lump sum, occasional sum or regular repayments of the loan, addressing any concerns about unforeseen circumstances.
• Capital growth: any growth on the investment is part of the trust and therefore will not further increase the size of your client’s estate.

• Four product choices: The Prudential Investment Plan, Prudential International Investment Bond, Prudential International Investment Portfolio and the Prudential Onshore Portfolio Bond.
• Probate: your client can choose for the loan to be waived on death, meaning that the trustees can access the money immediately.

Please remember that the value of your client’s investment is not guaranteed and can go down as well as up. The outstanding loan may not be repaid in full. 

The Loan Trust offers your client an alternative to giving away capital for good – it allows access to capital but any growth won’t further increase the estate.

Your client sets up the trust by appointing trustees, of which your client is one, and making an interest-free loan to them of the capital they wish to invest. This loan is interest free and repayable on demand.

The Loan Trust won't normally create any immediate Inheritance Tax charge although any outstanding loan remains part of your client's estate for Inheritance Tax purposes.

The trustees invest the loan in one or more of the single premium investment bonds on offer. Any growth on the capital is held outside of your client’s estate.

Your client can demand the balance of the outstanding loan at any time they need it – either as a lump sum, occasional sum or regular payments.  Repayments are funded by the trustees taking withdrawals from the bond. Each withdrawal is a partial repayment of the original loan.

Withdrawals can continue until the loan has been repaid to your client in full. Your client can receive up to 5% each year of the amount invested into the bond without creating an immediate Income Tax liability.

The loan can be waived in part or full at any time, which will create a Potentially Exempt Transfer (PET) or Chargeable Lifetime Transfer (CLT) for any amounts not exempt.

The Loan Trust offers a choice of trust - Absolute or Discretionary - so your client can decide which better suits their circumstances.

Absolute Trust

Your client must select the beneficiaries and their share of the trust fund when setting up the trust. The Absolute Trust may be suitable if your client is sure of how they'd like trust assets to be distributed.

Discretionary Trust

Trustees have the discretion to make distributions to anyone from a wide class of beneficiaries. The Discretionary Trust may be suitable if your client is unsure who they'd like trust assets to be distributed to.

For information on the types of trust available, download A guide to the Loan Trust (PDF).

How is a trustee held bond taxed?

The trustees can withdraw up to 5% of the original investment each year without any immediate tax liability.

On surrender or part surrender of the bond a chargeable gain arises which could trigger an Income Tax liability. Where a UK bond is used the gain is accompanied with a tax credit which satisfies the basic rate tax liability.

Who pays the Income Tax?

This depends on which type of trust your client has chosen.

Absolute Trust

The gain is treated as income of the beneficiaries and taxed at their highest marginal rate. Where a UK bond is used the gain is accompanied with a tax credit which satisfies the basic rate tax liability.

Discretionary Trust

If the settlors are alive and resident in the UK when an Income Tax liability arises, or it occurs in the tax year in which they die, the gain is treated as income of the settlors and taxed at their highest marginal rate. The settlors may recover the tax from the trustees.  

If an Income Tax liability arises after their death (other than in the tax year in which they die), or when they're not resident in the UK, the tax charge will be assessed against UK resident trustees at the additional rate of tax for individuals.

In either case, where a UK bond is used the gain is accompanied with a tax credit which satisfies the basic rate tax liability.

Prudential can facilitate both Set-up and Ongoing Adviser Charges.

More information on charges can be found in A guide to the Loan Trust (PDF).

The impact of taxation (and any tax reliefs) depends on your client’s individual circumstances.

The information is based on our understanding, of current taxation, legislation and HM Revenue & Customs practice, all of which are liable to change without notice.