Contributed by David Woolley, VIP Advice Lead, Croner Ltd
My client is considering creating a loan trust so that growth can remain outside of their chargeable IHT estate even though the loan remains within the estate. Are there any other tax issues to consider?
A loan from the settlor to the trust will likely make it settlor interested within ITTOIA 2005, s. 624 as the settlor can benefit from the loan capital in the trust while the loan exists and so there is a retained benefit within the meaning of ITTOIA 2005, s. 625 . Only a ‘charitable loan arrangement’ is excluded from being a settlement for this purpose per ITTOIA 2005, s. 620(1) .
If the loan was on arm’s length terms, e.g. with a commercial rate of interest chargeable, regular capital repayments and the loan secured, then there would be no element of bounty and so s. 624 could not apply. See Direct Tax In-Depth at ¶350-950.
The separate rule of ITTOIA 2005, s. 633 applies to any capital payment from the trust to the settlor and so would apply even if the loan was on arm’s length terms when s. 624 could not apply. However, there can be no double charge and so any income assessable under s. 624 would not be subject to s. 633 .
It is for this reason that the majority of loan trusts will invest in insurance bonds as these will create capital growth whilst often not producing any income at all. Instead, annual 5% withdrawals are often taken to help repay the loan which do not produce a chargeable event gain but provide the settlor with a return on the funds settled without an income tax liability. However, many such policies are insured on the life of the settlor and so would mature on the settlor’s death resulting in a chargeable event gain. Trust chargeable event gains are mostly assessable on the settlor under Condition B of ITTOIA 2005, s. 465 . In most cases this is a good thing as with top slicing relief the settlor will usually have a much lower tax liability that the trust and the executors of the estate can recover any income tax payable from the trustees under ITTOIA 2005, s. 538 .
A loan trust would not be gift with reservation simply because the legislation in FA 1986, s. 102 is differently worded to the ‘settlement legislation’ of ITTOIA 2005, s. 624 .
Navigate Tax coverage
Our Navigate Tax module on pre and post IHT planning for individuals provides useful insights to help you answer clients’ questions on this topic, including an overview of relevant points to consider, a case study, and tools such as a Mindmap and a hand-out sheet for clients.
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Other useful links
For more information on the income tax anti-avoidance rules on trusts, see Direct Tax In-Depth at ¶356-000.
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Document downloaded on 24-04-2026 from Croner Navigate, the UK’s leading online research service for tax, audit and accounting professionals. Find out more at www.croneri.co.uk or call 0800 231 5199.
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