What Is an Inheritance Tax Loan Trust?

• A loan trust uses a loan, not a gift, to fund a discretionary trust
• The loan value stays in your estate and can be repaid on demand
• All investment growth is immediately outside your estate for inheritance tax
• There is no upper limit on how much can be loaned
• Loan trusts are often used when gift allowances are already exhausted

A discretionary trust funded by a repayable loan. The loan value remains part of the settlor’s estate. Investment growth belongs to the trust and is outside the estate.

A trust funded by an outright gift. The value leaves the estate after seven years, but the capital cannot usually be reclaimed.

A trust where capital can be returned in stages after seven years. Commonly used by married couples with higher combined allowances.

This article focuses solely on loan trusts and their role in inheritance tax planning when access to capital must be retained.

A loan trust has two distinct elements:

1. The trust itself
   • Usually set up as a discretionary trust
   • Registered with HMRC
   • Can exist for up to 125 years
2. The loan
   • Made by you to the trustees
   • Unlimited in size
   • Repayable on demand

Because the funding is a loan, not a gift, the capital does not trigger the seven-year rule.

Loan trusts can be established either using off-the-shelf insurer documentation or bespoke trust deeds drafted by solicitors. 

At Bluebond, we use bespoke discretionary trust deeds drafted by qualified solicitors employed within our business. This ensures the trust can exist for up to 125 years, independently of any insurer, with full discretionary powers suitable for long-term estate planning.

The typical process is:

• A nominal gift, usually £10, settles the trust
• The trust is registered with HMRC
• You then loan any amount to the trustees
• The trustees invest the funds

The trust powers mirror those of a standard discretionary trust, allowing long-term planning flexibility regardless of any investment provider.

If you loan £1 million into a loan trust and the investment grows by 10 percent, that £100,000 of growth sits outside your estate from day one.

Only the original £1 million loan remains in your estate.

You can request repayment of the loan at any time. This makes loan trusts suitable for clients who want inheritance tax mitigation without losing control or liquidity.

Loan trusts are commonly used when:

• You have already used your full nil rate band for trust gifts
• You are within a seven-year waiting period on earlier gifts
• You want to prevent your inheritance tax exposure from increasing
• You may need access to capital later in life

They are especially effective as a holding structure while waiting for other planning windows to open.

A common strategy works as follows:

• You loan £325,000 into a loan trust
• Over seven years, investment growth accrues outside your estate
• After seven years, you withdraw the loan
• The growth remains in trust for beneficiaries
• The repaid capital can then be gifted or restructured

This approach allows inheritance tax exposure to reduce progressively without worsening the estate position.

Because the loan can be repaid at any time, funds can be accessed to:

• Pay education costs
• Help children or grandchildren buy property
• Provide support without permanent gifting

This flexibility is one of the loan trust’s key advantages.

We generally advise clients to review loan trusts before age 75.

At that point, the loan is often:

• Gifted outright to beneficiaries
• Settled into another trust
• Used to fund further inheritance tax planning

The objective is to ensure capital does not remain unnecessarily inside the estate in later life.

Loan trusts are particularly valuable for individuals with only one nil rate band available.

A typical strategy may involve:

• A gift into a flexible reversionary trust up to £325,000
• A separate loan trust for additional capital
• Withdrawal of the loan after seven years
• Recycling the capital into further planning

This provides both inheritance tax efficiency and protection against future care needs.

The most common misunderstanding is believing a loan trust removes capital from the estate. It does not.

The value lies in isolating growth while preserving access and control. Loan trusts are not a replacement for gifting strategies. They are a staging tool within a wider inheritance tax plan.

Before setting up a loan trust, consider:

• Have you already used trust gift allowances?
• Do you need ongoing access to capital?
• Is long-term trust flexibility important?
• Do you have an integrated will and estate plan?
• Have you reviewed age-related planning milestones?

• Using off-the-shelf insurer loan trust products without flexibility
• Assuming the loan itself is inheritance tax efficient
• Failing to plan an exit strategy for the loan
• Setting up trusts without coordinated legal and tax advice

An inheritance tax loan trust is a powerful planning tool for the right client. It allows investment growth to fall outside your estate immediately while keeping capital accessible and under control.

Used correctly, it forms part of a structured, long-term inheritance tax strategy rather than a standalone solution.

Professional advice is essential to ensure it is implemented correctly and aligned with your wider estate planning objectives.

Disclaimer. The information in this article is general in nature and does not constitute personal financial, tax, or legal advice. UK tax legislation changes frequently, and the specific application of any rule or strategy depends on individual circumstances. Figures, thresholds, and reliefs mentioned are correct as of the 2026 to 2027 tax year unless otherwise stated. Before acting on any information here, consult a qualified adviser who has reviewed your full situation. Bluebond Tax Planning provides personal recommendations only under a signed client agreement, following a full review. Bluebond Tax Planning operates under UK legal frameworks and recognised professional conduct standards. Tax planning and legal work are not FCA regulated.