Stand-out Q – loan trusts…

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THU, 06 APR 2017

Our Technical Hub provides access to a wide range of pension tax and trust technical resources. Every now and then we post tweets covering stand out questions from our technical content and our answers in case others might also find them helpful. As Twitter’s character restrictions only allow for the bare bones of the Q&A we link to the details here, too.

Question

What are the key features of the James Hay Wrap Loan Trust?

Answer

The settlor can receive regular or ad-hoc loan repayments. Commonly the underlying trustee investment will be an investment bond. The settlor can receive loan repayments in the form of bond withdrawals to provide an “income”. Strictly speaking the withdrawals are capital in nature. 5% withdrawals may be taken for up to 20 years on a tax deferred basis avoiding an immediate liability to income tax. So long as the loan repayments are spent the settlor’s estate will be reduced for IHT purposes.

It’s possible to accelerate the rate at which the loan falls outside of the settlor’s estate through the writing off of loan amounts using the annual IHT exemption of £3,000. The settlor has no access to loan amounts written off. On death of the settlor, any outstanding loan forms part of their IHT estate. Any growth in the trust fund is immediately outside of the settlor’s IHT estate.

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