A Gift and Loan Trust is a popular tool in estate planning, especially for people who want to reduce a future Inheritance Tax bill but aren’t quite ready to hand over full control of their money. It lets the settlor pass on any future growth of their assets to loved ones, while still being able to call back the original amount if they need it.
How the Gift and Loan Trust Works
The structure is deliberately simple: you create the trust with a token gift, and then you lend the trust the real money.
The gift. The settlor places a small amount into the trust first – something symbolic, like £10 or a small policy – to get the trust formally set up and to name the beneficiaries.
The loan. After that, the settlor makes a much larger, interest-free loan to the trustees. This loan usually has very flexible terms: it can be repaid whenever the settlor asks for it, in full or in part.
The investment. The trustees then use the loan to buy investments, most commonly an investment bond. From here, the money starts working inside the trust rather than in the settlor’s personal estate.
Why this matters. The clever part is that any future growth on the investment belongs to the trust – not the settlor – which means that growth drops out of the settlor’s estate straight away for IHT purposes.
Access if needed. If the settlor wants some of their money back, they simply request a loan repayment. The trustees withdraw from the investment bond and repay the relevant amount. So the settlor keeps access to their original capital but none of the growth sits in their estate.
Tax Considerations (UK Context)
Although the exact tax outcome depends on personal circumstances, the broad IHT rules look like this:
The loan stays in the estate. Whatever remains outstanding on the loan at death is still counted as part of the settlor’s estate, because they retain the right to call it back at any time.
The growth is outside the estate. All the investment gains inside the trust sit entirely outside the estate, which effectively “freezes” the estate’s value at the original loan amount.
Spending repayments reduces IHT. If the settlor takes loan repayments and then spends that money, their taxable estate reduces over time. This can make a meaningful difference.
Waiving the loan later. The settlor may choose, years down the line, to give up the right to the loan. This counts as a gift for IHT purposes and will be treated as either a PET or a CLT depending on the type of trust used.
Why People Use This Strategy
A Gift and Loan Trust strikes a balance that most other planning tools don’t: it moves future growth out of the estate immediately, but the settlor keeps the comfort of knowing the original capital is still available if life changes.
Absolute vs. Discretionary Loan Trusts
Choosing between these two trust types shapes how much control the settlor keeps and how the assets are treated for tax.
When an Absolute Loan Trust Makes Sense
This simpler version usually suits someone who:
- Is absolutely sure who the beneficiaries should be.
- Doesn’t need flexibility around how or when those beneficiaries receive assets.
- Wants the ability to use PET rules if they later decide to gift the loan.
The downside is that once the beneficiaries are fixed, there’s no changing course – and the value ends up inside the beneficiaries’ estates.
When a Discretionary Loan Trust Is Better
This structure tends to be far more popular because it works well when the settlor:
- Wants trustees to have flexibility to react to future events (divorce, debts, young children, or simply changing circumstances).
- Needs to cover a wider group – children, grandchildren, even future generations.
- Prefers to shield the assets from forming part of a beneficiary’s own estate or becoming exposed to creditors or divorce.
The trade-off is that discretionary trusts fall under the “relevant property” regime, which means periodic and exit charges if the trust grows significantly.
Summary
In short, an Absolute Loan Trust keeps things straightforward and avoids ongoing IHT charges, but it offers almost no flexibility. A Discretionary Loan Trust, on the other hand, provides much more protection and adaptability for the family – though it comes with the administrative complexities of the relevant property system.