The Ultimate Guide to Establishing a Loan Trust as a UK Expat

A loan trust offers a different approach. Instead of making an outright gift, you lend money to the trust and retain the right to repayment of the original loan while still offering potential inheritance tax planning benefits. This guide explains how loan trusts work, their tax implications, and the advantages and disadvantages UK expats should consider before establishing one.

What Is a Loan Trust?

Like other types of trust, a loan trust is a legal arrangement that can help pass assets to your chosen beneficiaries while potentially reducing your inheritance tax (IHT) liability.

Unlike many other trusts, however, you do not give your capital away outright. Instead, you make an interest-free loan to the trust and retain the right to request repayment of the original loan amount at any time, subject to the terms of the trust deed. This makes a loan trust particularly suitable for high-net-worth UK expats who want to undertake estate planning without permanently giving up access to their capital.

The loan is typically invested through an investment bond, allowing the underlying investments to grow while benefiting from the bond’s tax treatment under the UK chargeable event regime.

Investment bonds generally allow withdrawals of up to 5% of the original premium each policy year without triggering an immediate income tax charge. This is a tax deferral mechanism rather than a tax exemption, as any deferred gain is normally taken into account when a chargeable event occurs.

Any investment growth generated within the trust generally falls outside your estate for inheritance tax purposes, while the outstanding loan remains part of your estate until it is repaid and spent or validly given away. Depending on the type of trust used, the investment growth may still be subject to inheritance tax charges within the trust itself, as explained below.

Who Is Involved in Establishing a Loan Trust?

Settlor: The person who establishes the trust and lends the initial capital.
Trustees: The individuals or businesses who manage the trust and its investments.
Beneficiaries: The persons, usually your family members, who are entitled to receive trust benefits upon your death.

As the settlor of the trust, you may also serve as one of its trustees, which allows you to retain a role in the management and distribution of your assets. Still, it’s essential to appoint at least one additional trustee, such as a family member, close friend, or a company, to ensure your assets are administered and distributed according to your wishes in the event of incapacity or death.

What Types of Loan Trusts Are Available?

When establishing a loan trust, you can choose between two main types:

1. Absolute loan trust
2. Discretionary loan trust

Absolute Loan Trust

Absolute loan trusts require you to appoint the beneficiaries and specify their respective shares while establishing the trust, without the option to change your decision subsequently. This type of trust is most appropriate for UK expats who have clearly defined estate distribution plans and do not anticipate changes in their intentions.

A significant advantage of absolute loan trusts is their exemption from the periodic and exit IHT charges commonly associated with other types of trusts. While the original amount loaned to the trust remains subject to IHT until it’s repaid (and spent or validly given away), investment growth arising within the trust will generally fall outside your estate for inheritance tax purposes, provided the loan trust continues to operate as intended. In addition, each beneficiary’s fixed share of the trust fund forms part of their own estate and may be liable for IHT on their death.

Absolute trusts enable beneficiaries to demand their share of the investment gains once they reach 18 (16 in Scotland), but they cannot withdraw the loan’s outstanding balance, which remains repayable to you.

Discretionary Loan Trust

Discretionary loan trusts provide more flexibility over the distribution of the trust assets. They allow trustees to decide who will benefit from the trust, in what amounts, and when. However, the trustees can only allocate funds to individuals named as potential beneficiaries in the trust deed.

Unlike absolute loan trusts, discretionary loan trusts are subject to periodic and exit IHT charges under the relevant property regime. On every tenth anniversary of the trust, a periodic charge of up to 6% may apply to the value of the trust assets above the available nil-rate band (NRB), which is £325,000 for the 2026/27 tax year and frozen at this level until April 2031. For this purpose, the outstanding loan is treated as a liability of the trust, so the charge is broadly assessed against investment growth rather than the trust’s full value.

The available NRB at each ten-year anniversary is reduced by the settlor’s chargeable transfers in the seven years before the trust was established.

These trusts are also subject to exit charges whenever capital leaves the trust for a beneficiary, at any point during the trust’s life, not only in the first ten years. Before the first ten-year anniversary, the exit charge rate is based on the value that entered the trust. After that, it is based on the rate applied at the most recent ten-year charge. Exit charges do not apply to loan repayments made to you, but may arise when capital is paid out to beneficiaries.

Any chargeable lifetime transfers (CLTs) made during the seven years preceding the establishment of a discretionary loan trust will also reduce your available NRB. A CLT, typically a gift into a discretionary trust, is chargeable to IHT when it is made. Lifetime tax at 20% is only payable to the extent that cumulative CLTs exceed your available nil-rate band.

By contrast, a gift to an individual or an absolute trust is a potentially exempt transfer (PET) at the time it is made. It becomes fully exempt from IHT if you survive seven years. If you die within seven years, the PET fails and becomes a chargeable transfer, which is added to your cumulative total of chargeable transfers and assessed against the available nil-rate band.

Distinguishing between PETs and CLTs matters for loan trusts because settlors don’t typically gift funds to these trusts. They make a loan instead, which is not a transfer of value. However, waiving your right to repayment of the loan is a gift: a PET if the trust is absolute, or a CLT if the trust is discretionary.

Consulting a financial adviser, like those available at Titan Wealth International, can help you choose a loan trust that aligns with your financial circumstances and supports your inheritance tax and investment objectives.

How Does a Loan Trust Work?

Leveraging the benefits of a loan trust as a part of your estate planning strategy involves three essential steps:

1. Establishing a loan trust
2. Investing the funds
3. Requesting a repayment

Establishing a Loan Trust

Setting up a loan trust involves choosing the type of trust that meets your estate planning and financial goals. Discretionary loan trusts provide greater flexibility over the distribution of your assets, but are subject to periodic and exit charges and potentially lower NRBs. Meanwhile, absolute loan trusts avoid those trust charges, but offer limited flexibility over who benefits and in what shares.

Once a loan trust is established, you are required to appoint trustees. While you may serve as one of the trustees, you must appoint at least one additional trustee: a loan trust should not normally have a sole trustee, as the borrower and lender should not be legally identical.

The loan made to the trust is a lump sum cash amount that is interest-free and, under most providers’ standard deeds, repayable on demand. The precise repayment terms depend on the trust deed.

Investing the Funds

Your trustees, possibly including yourself, invest the loaned capital into an investment bond to facilitate asset growth. You can invest in onshore or offshore bonds depending on your financial goals.

Both types of investment bonds invest in assets such as shares, collective investment funds and property. Their main tax advantage comes from the way gains are taxed under the chargeable event rules rather than from the investments themselves. This means that the personal tax liability is deferred until a chargeable event occurs, which includes withdrawals exceeding the 5% allowance.

Offshore bonds are often attractive for UK expats for the following reasons:

TAR historically applied only to offshore bonds. Since the Finance Act 2013, it also applies to onshore policies issued on or after 6 April 2013 (or earlier policies varied after that date so as to increase benefits or extend the term).

Requesting a Repayment

Under most standard loan trust deeds, you can request repayment of the outstanding loan at any time and receive it as a lump sum, occasional payments, or regular installments. The repayments are funded through investment bond withdrawals that the trustees make on your behalf.

Investment bonds held within the trust allow withdrawals of up to 5% per year of the original premium without triggering an immediate income tax charge. The 5% allowance accrues for a maximum of 20 policy years, a cumulative total of 100% of the premium paid, and any unused allowance carries forward until that cumulative limit is reached, allowing for larger tax-deferred withdrawals in the future. Note that the 5% allowance is an income tax deferral mechanism; it does not directly affect the IHT treatment of loan trust repayments.

What Are the Tax Implications of Establishing a Loan Trust?

Lending funds to a loan trust isn’t a gift, so there is no transfer of value when establishing the trust. Since you’re still entitled to repayment, the outstanding loan remains part of your estate. Any loan outstanding at your death forms part of your estate and may be subject to IHT at up to 40%, depending on your available nil-rate band, other allowances, and exemptions.

Each repayment you receive reduces the outstanding loan. However, that only reduces your taxable estate if you spend the repaid funds or give them away (and survive any relevant seven-year period). Otherwise, the cash replaces the loan as an asset of your estate.

Repayments to you must never exceed the outstanding loan balance. Because you make a loan rather than a gift, the gift with reservation of benefit (GROB) rules do not normally apply to a properly established loan trust. That is one of its key design features.

If you receive value beyond what you are owed, that can amount to benefiting from trust property. It may put the trustees in breach of trust and can engage the gift with reservation or pre-owned assets rules, jeopardising the IHT effectiveness of the arrangement. Trustees should keep clear records of the loan and every repayment.

The growth generated within the trust belongs to the trust and falls outside your estate for IHT on your death. For discretionary loan trusts, however, that growth is relevant property and can attract the ten-yearly periodic charges and exit charges.

Income tax on the trust’s investments depends on the wrapper and the parties involved. Where the trust holds an investment bond (the usual arrangement). tax arises under the chargeable event regime rather than as ordinary trust income:

• While the settlor is alive and UK resident, chargeable event gains are generally assessed on the settlor at their marginal income tax rates (up to 45%).S1
• After the settlor’s death (from the tax year following death), or in certain other cases, gains are typically assessed on UK-resident trustees at the trust rate, currently 45% on such gains. From 6 April 2027, the trust rate on savings and property income will increase from 45% to 47% under measures announced in the 2025 Autumn Budget; the 39.35% trust rate on dividend income is unchanged. Where a discretionary trust’s income exceeds the £500 de minimis in a tax year, the whole of that income is taxed at trust rates; the £500 is not a tax-free slice once exceeded.
• Where the trustees are non-UK residents, gains may instead be attributed to UK-resident beneficiaries who receive benefits.
• Where the settlor is a non-UK resident at the time of a chargeable event, the UK position depends on residence status and, on any later return to the UK, on the availability of time apportionment relief. That is a central planning point for expats and should be reviewed with an adviser before any surrender.

For absolute (bare) loan trusts, income and gains are generally taxed to beneficiaries at their own marginal rates, up to 45%. Still, bond gains may be assessed on the settlor while alive and UK resident under the settlor charge rules.

How the Residence-Based IHT Regime Affects Loan Trusts for UK Expats

Since 6 April 2025, the UK has operated a residence-based system for inheritance tax instead of the previous domicile-based regime. Under the Finance Act 2025, for inheritance tax purposes, an individual is treated as a long-term UK resident (LTR) once they have been a UK tax resident for at least 10 of the previous 20 tax years.

If you are an LTR at the time of your death, the outstanding loan owed to you by the trust forms part of your estate for inheritance tax purposes. In addition, if you receive benefits from the trust beyond repayment of your outstanding loan, the gift with reservation of benefit (GROB) rules and, in some circumstances, the pre-owned assets tax (POAT) rules may also need to be considered.

If you’re relying on any existing offshore trust structures established before the introduction of the residence-based regime, specialist advice is essential. The inheritance tax treatment of excluded property trusts and other offshore arrangements has changed significantly, and the rules are complex and continue to evolve.

For internationally mobile individuals, the inheritance tax treatment of the same loan trust can change over time as their UK residence status changes. Reviewing your residence history before establishing a loan trust—and again before any significant trust transaction or chargeable event—can help ensure the arrangement continues to meet your estate planning objectives.

What Other Factors Should You Consider Before Setting Up a Loan Trust?

Before you establish a loan trust, consider the following factors to ensure its features align with your estate planning goals:

1. Rules for waiving the right to the loan
2. Treatment of a loan trust upon death

Rules for Waiving the Right to the Loan

If you no longer need access to the outstanding loan, you may waive the full or partial right to the loan (normally by deed). Doing so releases the trustees from the obligation to repay, and the bond is then held solely for the benefit of the beneficiaries. The waiver is a transfer of value for IHT purposes: a potentially exempt transfer (PET) if the trust is absolute, or a chargeable lifetime transfer (CLT) if the trust is discretionary.

If you die within seven years of waiving a loan in favour of an absolute trust, the PET fails and becomes a chargeable transfer. It is added to the cumulative total of chargeable transfers in the seven years before death and assessed against the available nil-rate band (£325,000 for 2026/27).

Taper relief may reduce the inheritance tax payable on the failed PET where death occurs between three and seven years after the gift, although it only reduces tax actually payable. , applying only once cumulative gifts exceed the nil-rate band.

A waiver in favour of a discretionary loan trust is a CLT and is immediately chargeable to inheritance tax at the lifetime rate of 20% to the extent that cumulative CLTs in the previous seven years exceed the nil-rate band.

• Waiving the loan in instalments: You can use the annual IHT exemption of £3,000 to waive smaller amounts free of inheritance tax. Any unused annual exemption can be carried forward for one tax year only, allowing up to £6,000 to be waived in a single year if the previous year’s exemption was unused.
• Transferring the right to your spouse or civil partner: Transfers between spouses or civil partners are generally exempt from IHT. However, if the transferor is a long-term UK resident and the recipient spouse or civil partner is not, the exemption is capped (currently at £325,000) unless the recipient elects to be treated as a long-term UK resident, which brings their own worldwide estate into the UK IHT net. Mixed-residence couples should take advice before transferring loan rights.

Treatment of a Loan Trust Upon Death

If you (the settlor) die before the outstanding loan is repaid, the remaining amount is an asset of your estate and may be subject to IHT. What happens next depends on your will and your personal representatives, not the trustees alone:

• The loan is called in: Your personal representatives may demand repayment, in which case the trustees will normally repay the loan from trust assets, which may involve surrendering investment bond segments if there are insufficient cash balances. Note that a surrender can itself trigger a chargeable event gain, so the income tax consequences should be reviewed before encashment.
• The loan is left or waived by will: Depending on your will, the benefit of the loan may pass to your spouse, to the beneficiaries, or be waived in favour of the trust so that the trustees retain the full fund. Your will should address the outstanding loan expressly to avoid an unintended forced encashment.

If a trustee dies and only one trustee remains, it is necessary to appoint a new person to the role to ensure the trust continues to be properly administered. Upon a beneficiary’s death, the position depends on the type of trust. Under an absolute loan trust, the deceased beneficiary’s fixed share forms part of their own estate for IHT and passes under their will or intestacy. Under a discretionary loan trust, beneficiaries have no vested entitlement, so nothing is included in a beneficiary’s estate on death. The trustees continue to exercise their discretion among the remaining beneficiaries.

What Are the Benefits of Establishing a Loan Trust?

Setting up a loan trust entails the following advantages:

• Inheritance tax benefits: Loan trusts remove future investment growth from your taxable estate from day one, while the outstanding loan remains within it. Therefore, the IHT benefit builds over time as your investments grow and you make loan repayments.
• Access and control: You retain the right to repay the outstanding loan balance, so you do not permanently give up access to your capital. By acting as one of the trustees, you can retain a role in the trust management.
• Flexibility: Loan trusts, particularly discretionary ones, allow the amount and timing of distributions to beneficiaries to be adapted over time.

What Are the Risks Associated With Creating a Loan Trust?

Loan trusts include the following risks and drawbacks:

• Limited IHT benefit on the capital itself: Only investment growth leaves your estate. The loaned capital remains inside it until repaid and spent, or validly waived, so a loan trust is not a way to remove existing wealth from IHT immediately.
• Investment risk: The trust’s investments can fall as well as rise. If the value of the trust investments falls below the outstanding loan, the trustees may have insufficient assets to repay the loan in full without realising losses.
• Limited access to growth: You can access the original capital through loan repayments, but you can never benefit from the investment growth. Doing so would risk breach of trust and adverse IHT consequences.
• Reduced asset control: The trust assets are held by the trustees for the beneficiaries. Even as a trustee, you must act in the beneficiaries’ interests, and the arrangement cannot simply be unwound if your circumstances change.
• Charges and tax change risk: Bond charges, trust administration costs, and advice fees reduce returns, and both UK and overseas tax rules can change, as the 2025–2027 reforms illustrate, potentially altering the effectiveness of the structure.
• Cross-border risk: Your country of residence may tax the bond or the trust unfavourably, or not recognise the trust at all.