Bank of Scotland has launched a new loan trust aimed at reducing inheritance tax liabilities. Head of wealth management Chris Haines said...

Bank of Scotland has launched a new loan trust aimed at reducing inheritance tax liabilities. Head of wealth management Chris Haines said it was possible to reduce IHT by making lifetime gifts of capital that reduced the overall value of a taxable estate while still allowing access to the capital. "Substantial outright gifts are not always desirable or possible as the person may require access to that capital. So this trust can be an effective solution as it enables inheritance tax savings over time while allowing for continued access to the original capital". "This financial planning tool involves setting up a loan trust for chosen beneficiaries (excluding yourself or your spouse or civil partner). You make a loan to the trustees which they place in an investment bond. The loan is interest free but is repayable on demand under a binding legal obligation. You therefore always have access to your capital." Any growth on the investment is held outside the estate for the trust beneficiaries. The outstanding loan will remain as an asset of your estate and so potentially be subject to inheritance tax on your death but the loan, and the inheritance tax liability, is reduced as you take repayments on the loan for use as income. "You have effectively frozen the inheritance tax liability of your investment at its current value," said Mr Haines. Bank of Scotland research, based on recently released data from HM Revenue & Customs, shows the total number of estates paying inheritance tax rose by 72 per cent over the five years to 2003/04, to 30,451. The UK government's own estimates suggest a further 22 per cent increase in the number of estates paying the tax by the end of 2006/07. More estates are now paying IHT as the threshold for the tax has failed to keep pace with the increase in property prices over the past decade.