26/11/2017
A guide to the Loan Trust
Your questions answered2 Your Questions Answered
Why use a loan trust? 3
What is the loan trust? 4
How the loan trust works 5
Choice of trust 6
Setting up a loan trust 7
Further information 8
Important notes 8
ContentsYour Questions Answered 3
Why use a loan trust?
In today’s world, it is becoming harder and harder to be a generous parent or grandparent.
Being able to pass on capital (your 'estate') to your children and grandchildren is a natural instinct. But this has to be balanced
against your need to access that capital during your lifetime.
Loan trusts are for those who want to carry out Inheritance Tax (IHT) planning but can't quite give up access to their capital. Using a
loan trust allows you to access your original capital at any point but the growth will not be included in your estate for IHT purposes.
You can see how IHT might affect you in the table below.
It’s worth remembering that the value of your house may form part of your estate. For many people, this may be what pushes them
over the IHT threshold.
In addition, the Government has introduced a main residence nil-rate band (RNRB) from the 2017/18 tax year starting at £100,000,
increasing to £175,000 in the 2020/21 tax year.
There are certain conditions to be met for your estate to benefit from the RNRB. You should speak to your financial adviser
about this.
For up to date information on IHT please speak to your financial adviser, or visit the Money Advice Service website:
https://www.moneyadviceservice.org.uk/en
Prudential’s Loan Trust has been designed to bring a potentially tax-effective solution within your reach in a simple manner.
There are two types available – absolute loan trusts and discretionary loan trusts. When you set up either of these, there is no
transfer of value for IHT purposes as there is no gift, just a loan.
The value of investments is not guaranteed and can go down as well as up. You and/or the beneficiaries of the
trust, could get back less than invested.
Size of estate Rate of tax
£0 – £325,000 Nil
Over £325,000 40% on excess
The existing nil-rate band (NRB) will remain at £325,000 until the end of 2020/21.
Important note
It’s possible that the Government and HM Revenue & Customs may propose future changes to the taxation treatment of
arrangements such as the loan trust. Prudential and Prudential International accept no responsibility or liability for the effect of
such changes.4 Your Questions Answered
The loan trust is an alternative to
giving away capital for good
How the loan trust works is explained in
detail on page 5. Briefly, what happens
is that you create a trust, for the benefit
of your beneficiaries, and nominate the
trustees (including yourself). You make
a loan to the trustees, which is invested.
As any capital growth on the investment
is part of the trust, it doesn’t form part of
your estate. Any part of the loan that isn’t
repaid will remain an asset of your estate
for IHT purposes.
What benefits can the loan trust
offer you?
The loan trust provides you with access to
your original capital sum. You can claim
back the balance of your outstanding loan
at any time you require it. This can be as
one lump sum, occasional sums or regular
repayments of the loan. This should help
take care of worries about unforeseen
circumstances. You can’t take back more
than the total amount you have loaned.
The loan trust won't create any
immediate IHT charge, although any
unrepaid balance of the loan remains part
of your estate for IHT purposes. You can
decide what should happen to any
amount of the loan that is unrepaid at
your death. You may wish to gift some or
all of any outstanding loan to the trust
during your lifetime. This has an IHT
impact. Please speak to your financial
adviser for further information.
Your investment options
There are four investment options.
> The Prudential Investment Plan offers
a wide range of funds and flexible
charging options.
> The Prudential Onshore Portfolio
Bond is available on a number of
investment platforms. The bond
offers access to the range of assets
available on the selected platform.
> Prudential International Investment
Bond also offers a choice of
unit-linked funds.
> Alternatively, Prudential International
Investment Portfolio gives you the
choice of a wide range of funds,
including unit trusts, investment trusts
and Open Ended Investment
Companies (OEICs), from an
extensive list of fund managers.
The investment will be managed by
Prudential or Prudential International.
Funds are managed by various asset
management companies of Prudential
around the world.
Prudential International Investment Bond
and Prudential International Investment
Portfolio are international bonds, which
offer tax-efficient growth. There is no tax
deducted from the funds available other
than withholding tax, which applies to the
dividends of some assets within the funds.
Further information on your investment
choices is given in the guides for the
each of the bonds available.
What is the loan trust?Your Questions Answered 5
The loan trust works like this
You set up the trust by appointing
trustees, including yourself, and making
an interest-free loan to them of the
capital that you wish to invest.
The loan is repayable on demand.
The trustees invest this capital in one or
more of the single premium investment
bonds mentioned on page 4. These
bonds can be set up in different ways
and we strongly recommend that trustees
refer to their financial adviser when
considering the options available.
You can get the balance of your
outstanding loan at any time you need it.
This can be as one lump sum, occasional
sums or regular repayments. Your
repayments are funded by the trustees
making withdrawals from the bond. Each
withdrawal acts as a partial repayment of
your loan.
Withdrawals can continue until your loan
has been repaid to you in full. You can
currently receive up to 5% each year of
the amount invested into the bond
without creating an immediate income tax
liability. This 5% allowance is available
until you have received the full amount of
the original investment (that is, your loan).
If at any time you decide you no longer
need the outstanding part of your loan,
you can waive the loan in full or part. This
can create a potentially exempt transfer
(PET) or a chargeable lifetime transfer
(CLT) of the amount of the loan being
cancelled offering further IHT planning
potential, and you should seek
appropriate advice.
Under an absolute trust the amount
waived (if not exempt) will be a PET and
under a discretionary trust it will be a
CLT, if not exempt.
Once your loan has been completely
repaid, you can’t receive any
more payments.
Any growth on the capital
invested is held outside
your estate
Whether you take any repayments or
not, any growth on the capital invested
is held outside your estate. Please
remember that the value of investments
can go down as well as up. You, and/or
the beneficiaries of the trust, could get
back less than invested.
Adviser Charges
Prudential will facilitate ongoing adviser
charges for advice given to the trustees.
If required, the trustees should complete
the ongoing adviser charge instruction
section on the bond application form.
Where Prudential facilitate payment
of ongoing trustee advice, this
will be funded by withdrawals from
the bond and will count against the
5% tax deferred allowance.
With regard to set up advice charges
which are incurred by the settlor
(ie: person setting up the trust) and
facilitated by Prudential, the position is
that the loan to the trustees will comprise
gross funds available before advice
charges. The trustee investment amount
will then be the lower amount net of
these set up charges. The difference
should be recorded by the trustees as
a loan repayment.
If the trustees decide to pay a financial
adviser for ongoing advice by way of
ongoing adviser charge deductions
from the bond, it’s possible that the
deduction of adviser charges may erode
the capital available for the repayment
of the loan if growth on the capital is
low. The same would apply to deduction
of ongoing investment adviser charges
under the Prudential International
Investment Portfolio.
Depending on the terms and conditions
of the product involved, Ongoing Adviser
Charges, Ad hoc Adviser Charges and
for Prudential International Investment
Portfolio any Ongoing Investment Adviser
Charges, may reduce the ability to take
withdrawals for loan repayment.
Details of the various adviser charges
and how they impact the 5% allowance
and product limits for withdrawals
can be found in the relevant key
features document.
How the loan trust works6 Your Questions Answered
Choice of trust
The loan trust offers you a choice of
trust – absolute or discretionary – so
you can decide which better suits
your circumstances.
Absolute Trust
With the absolute loan trust you must
select both the beneficiaries and their
share of the trust fund at the time you
set up the trust. The important point to
remember about an absolute trust is that
you cannot change the beneficiaries or
their share of the trust fund once the
trust has been set up.
If you are sure of how you want the trust
assets to be distributed, this could be the
appropriate choice for you.
All the capital growth on your investment
will be immediately outside your estate.
The trust itself will not be subject to any
periodic or exit IHT charges, but each
beneficiaries’ share of the trust fund will
be treated as forming part of their estate.
With an absolute trust, the beneficiaries
can have or demand access to any
proceeds of the investment growth (but
not the outstanding balance of the loan),
at any time when a child is considered to
be an adult and become legally entitled to
the trust asset – otherwise known as the
age of majority. Part of the investment
growth can be used at any time by the
trustees for the benefit or maintenance
of your beneficiaries.
Discretionary Trust
Under a discretionary trust, it's up to the
trustees to decide who will benefit and
when they will benefit from the trust
fund. Providing the beneficiary is in the
class of beneficiaries, the trustees can
allocate funds to them.
A discretionary trust is potentially subject
to periodic and exit charges where
applicable. Every 10 years the trust will
potentially be subject to a periodic
charge. This is based on the value of the
trust fund, which is any capital growth
on your investment, at the date of the
charge. Where you have not made any
chargeable transfers in the seven years
before you set up the trust, and the
value of the trust fund is less than the nil
rate band allowance at that time, there
will be no inheritance tax to be paid.
Part of the investment growth can be used
at any time by the trustees for the benefit
or maintenance of your beneficiaries.
When benefits are paid out of the trust to
your beneficiaries, there may be an exit
charge. This is based on the previous
periodic charge (or the charge when the
trust was set up if there has not yet been
a periodic charge). If the previous charge
was nil, the exit charge will also be nil,
even if the trust fund value has grown.
Repayments of your loan are not treated
as ‘exit’ payments. The value of the trust
fund is not included in the estates of
your beneficiaries.Your Questions Answered 7
Setting up a loan trust
Appoint trustees
(including yourself)
Make an interest-free loan
to trustees
Complete the appropriate
trust and loan documents
Agree regular loan
repayments (if any)
with trustees
Complete application for
your chosen bond(s)
You
Trustees buy investment bond(s)
Any capital growth is held in
trust outside your estate
Choose which type of trust
you want
Your loan is
repayable on
demand as:
> a single sum
> occasional sums
> regular sums
Absolute or DiscretionaryFurther information
Details of the charges applicable to the
bond(s) for which you apply are shown in
the relevant key features document.
Your financial adviser will give you a
personal illustration for each bond within
your loan trust, together with a key
features document describing in more
detail how the chosen bond(s) work.
The value of units and any payments out
from them can go down as well as up and
are not guaranteed. The total returns
to the trust beneficiaries and, where
appropriate, to you may be less than
the full amount invested.
Full terms and conditions of Prudential
Investment Plan, Prudential Onshore
Portfolio Bond, Prudential International
Investment Bond and Prudential
International Investment Portfolio are
available on request.
Important notes
Anyone thinking of using the loan trust, or
doing anything under the provisions of the
trust, must seek and rely on the advice of
a suitable tax and trust practitioner. You
should seek appropriate professional
advice before proceeding.
This is very important for a number
of reasons.
> Where a withdrawal exceeds all or
part of the available 'cumulative' 5%
tax deferred allowance, income tax
may be payable when repaying all
or part of the outstanding loan.
> This trust will not be suitable in all
cases and other forms of tax and
trust planning may be more suitable
in individual circumstances.
> Creating a trust can have taxation
as well as legal consequences.
> Once a trust has been created it
cannot be revoked.
> The trustees have special duties to
the Settlor and Beneficiaries and the
misuse of a trust power by a trustee
can make her/him personally liable
for resulting losses.
> Situations that may involve
international or cross-border
legal and taxation issues can be
extremely complex.
> Tax and trust law can be open to
differing interpretations.
The information in this brochure is
based on our understanding of current
taxation, legislation and HM Revenue &
Customs practice, all of which are liable
to change without notice. The impact of
taxation (and any tax reliefs) depends on
individual circumstances. Every care has
been taken as to accuracy, but it must be
appreciated that Prudential, Prudential
International and their representatives
cannot accept responsibility for loss,
however caused, suffered by any person
who has acted or refrained from acting
as a result of the material published in
this brochure or with the use of
accompanying trust instruments.
Investors must consult their own
professional advisers for advice relevant
for or to their own circumstances.
Prudential Distribution Limited is registered in Scotland. Registered Office at Craigforth, Stirling, FK9 4UE. Registered number SC212640. Authorised and regulated by
the Financial Conduct Authority.
The registered office of Prudential International is in Ireland at Montague House, Adelaide Road, Dublin 2. Prudential International is a marketing name of Prudential
International Assurance plc. Registration No. 209956. Telephone number + 353 1 476 5000. If the Company should become unable to meet its liabilities, the Financial
Services Compensation Scheme will protect eligible policyholders habitually resident in the UK when their contract starts, with effect from 1 December 2001. This
protection does not extend to externally-linked investments. Prudential International Assurance plc is authorised by the Central Bank of Ireland and is subject to limited
regulation by the Financial Conduct Authority for UK business. Details on the extent of our regulation by the Financial Conduct Authority are available from us on request.
www.pru.co.uk
IHTB10023 10/2017
