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Is it better to use multiple gift and loan trusts?

Rysaffe principle can open the door to big inheritance tax planning benefits


One of the more common estate planning solutions used by advisers in the UK is a gift and loan trust – this is because the client is not actually gifting large amounts of money.

Some generations are hesitant when gifting money, which can be understandable – they have spent a lifetime accumulating wealth and don’t know what the future holds. If you live in Wisconsin, you may apply for one of Milwaukee Installment Loans online.

Therefore lending money can, even just psychologically, feel a better option, writes Canada Life’s market development manager, Neil Jones.

Offers comfort

The premise of a gift and loan is simple.

A trust is created with a small nominal gift, usually £10 ($13, €12), and then the settlor lends a large sum of money, on an interest-free basis, to the trustees and they invest the money.

The client retains access to their loan and can request repayments when required either on a regular basis or ad-hoc.

This provides some comfort should circumstances change.

From a UK inheritance tax point of view, the £10 gift would normally be covered by an exemption and the loan isn’t a gift, so not a chargeable lifetime transfer or potentially exempt transfer.

Using more than one

When looking at loaning large amounts of money it is usually prudent to do so using multiple trusts.

Some wonder why, as it requires more paperwork and multiple investments, which could incur higher charges.

Let’s look at the two main reasons such a strategy is adopted: Rysaffe planning and the correct way of waiving loans in the future.

When using a discretionary trust, while it provides flexibility on who benefits and when, the normal rules around a discretionary trust still apply.

They can be subject to periodic charges on every 10-year anniversary and exit charges can apply.

With any estate planning strategy the order of gifting is important and, ideally, the gift and loan trust should come before chargeable lifetime transfers and potentially exempt transfers.

This allows a gift and loan trust to have a full nil rate band when calculating a 10-year periodic charge, so using multiple trusts can allow each trust to maximise the available nil rate band.

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The amount available in the calculation on a 10-year anniversary is the nil rate band, at that time, less any chargeable transfers in the seven years before the trust was created.

If a gift and loan trust has a full nil rate band, then creating another the next day will allow the second trust to also have a full nil rate band. This is best explained by an example.

For example…

Two friends, Richie and Eddie, each have £2m and both want to set up gift and loan trusts to help reduce the potential increases in the inheritance tax liabilities they will leave their families.

Richie proceeds with a single arrangement.

He sets up his trust with an exempt £10 gift and proceeds with the loan of £2m to the trustees, who then invest this in an international bond.

Eddie however uses five different trusts; Trust 1 on Monday, Trust 2 on Tuesday and so on.

There are five £10 gifts and, like Richie, these are covered by the annual gift exemption; the loans of £400,000 are passed to the trustees and each is invested in an international bond.

Neither Richie nor Eddie take any loan repayments and 10 years later the £2m investments grow to £4m.

We will assume the nil rate band has grown to £400,000.

Richie’s trustees need to calculate the potential periodic charge.

The net value of the trust – in this instance is £4m less the outstanding loan of £2m, which leaves £2m.

Then they deduct the available nil rate band less any chargeable lifetime transfers or failed potentially exempt transfers in the seven years before the trust is established, which in this instance is zero.

The periodic charge on Richie’s trust is 6% of the excess over the available nil rate band, so ((£2m – £400,000) x 6%) = £96,000.

The trustees will have to pay this from the trust assets, reducing the money that is available for the beneficiaries.

As there is a periodic charge then for the next 10 years, any distributions from the trust to a beneficiary will attract an exit charge, again reducing the amount available to the beneficiaries.

Eddie, on the other hand, has five trusts and the trustees of each need a similar calculation based on a net value of each of £800,000 – £400,000 = £400,000.

As Eddie did not make any gifts in the seven years before Trust 1, the trustees benefit from a full nil rate band and therefore no periodic charge applies as there is no excess.

The trustees of Trust 2 also have a full nil rate band as, like Trust 1, there were no gifts in seven years before the trust was created, and therefore no periodic charges arise. Trust 3, Trust 4 and Trust 5 are all similar – each gets a full nil rate band and no periodic charges apply.

In turn, no exit charges will apply for the following 10 years.

What a difference a day makes

Although Eddie has five trusts to deal with, and may have increased charges due to five international bonds, he has saved £96,000 by splitting the loan over five trusts.

If he had created his trusts on the same day then they would have been treated as related settlements and been aggregated for the periodic charge calculation.

The definition under Section 62 of the Inheritance Tax Act 1984 is any trust which has the same settlor and commenced on the same day; so, by writing them on separate days, even just a day apart allows each one to be calculated independently.

This planning has allowed more money to remain in the trusts and increase the money available to the beneficiaries.

The number of trusts required will depend on the amount being loaned and the exit strategy – in Richie’s example it is possible that a periodic charge could arise on the next 10 year anniversary, so if the money is likely to be in trust for longer he could have used more trusts to further reduce the growth on each.


While the use of multiple trusts can be advantageous from a tax perspective, it can also help should Richie or Eddie want to waive part of the money they loaned.

It is not uncommon for a settlor to want to waive a loan they have made.

While they may be concerned about retaining access initially, this may not continue.

They could write to the trustees and tell them that they intend to waive the loan and if a discretionary trust is used then it would be a chargeable lifetime transfer.

In Eddie’s scenario, he has five smaller trusts and he could waive a single loan and this would be covered by the nil rate band.

Seven years later he could waive the loan under another trust and so on. Again, if waiving a loan is a possibility then this could influence the number of trusts being used at outset.

If Richie decided to waive his loan of £2m then it would be a chargeable lifetime transfer far in excess of his nil rate band and be subject to an entry charge.

Future distributions would be subject to exit charges and 10-year periodic charges would undoubtedly apply each and every 10-year anniversary.

This would further reduce the money available to the beneficiaries.

He could consider a partial waiver to just use his nil rate band, however he would need to be mindful of a potential gift with reservation issue.

Under a gift and loan trust, the settlor should not benefit from gifted property, but at outset the only gifted property is the initial £10 gift.

The value of the bond in trust is settled property as it lies in a discretionary trust, however it is not derived from a gift as it was loaned money.

For the trust to be caught by the gift with reservation trap, Richie would need to enjoy some sort of reservation of benefit from what he has given away.

That means there has to be some element of gift in the trust property, so not an issue at outset as the only gift was the £10 and he is only entitled to his loan repayments from bond under the trust.

If Richie were to waive part of his loan then he would be making a gift, so there would be settled property in the underlying bond and according to paragraph 5(4), Section 20 of the Finance Act 1986 the whole bond would be settled property.

I have never heard of HM Revenue & Customs (HMRC) questioning any partial waivers, but for clarity it is simpler to just waive whole loans.

Again, the use of multiple trusts can help with this.

This article was written for International Adviser by Neil Jones, market development manager at Canada Life.

Jones is a member of the IA Tax Panel

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