If we lend money to adult children from a trust is it tax free

Is a loan from a trust tax free? The answer to that question depends on the type of trust – most flexible reversionary trusts do not allow loans, but you can make gifts out of the trust which are subject to income tax on the actual beneficiary.

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Discretionary trusts can loan money to your adult children tax-free. There is never tax on a loan. There is tax on interest and there is tax on capital gains.

If on the second death, there is more than £325,000 going into the trust, this will exceed the Nil Rate Band allowance and the inheritance tax will be payable on the money going in. Then, at the 10th anniversary, if the amount in the trust is over the allowance this will be subject to a periodic charge of 6%.

You can withdraw the money from that trust as a loan to retain the protection. If you take the money out of the trust you will lose the protection of the trust on that money. A loan will still count as money being part of the trust assets and therefore subject to that periodic charge, but usually it is worth paying the 6% every 10 years to retain the protection of the trust.

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