guide to your loan trust - quilter international · 6 guide to your loan trust settler – the loan...

Guide to your Loan TrustBare version

Front cover title goes here2

ContentsWhat is the Quilter International loan Trust? �� 3

How a loan trust works �� 4

Benefits of your loan trust being invested in a Quilter International bond �� 8

How the trust works in practice �� 9

Your questions answered ��12

Policyholder protection �� 14

Further information �� 14

Quilter International 3

Summary The Quilter International Loan Trust is an inheritance tax planning arrangement which is specifically designed to mitigate potential inheritance tax liability by way of making an interest-free loan to your appointed trustees.

The arrangement gives you, the lender (also known as the settlor), access to your capital through regular or ad-hoc withdrawals as repayment of the loan, which is repayable on demand, whilst allowing growth on the capital to be passed to the beneficiaries, free from inheritance tax.

If in the future you find that you have sufficient money to support your day-to-day living and decide you no longer require repayment of all or part of the loan, you could waive all or part repayment of the loan, which will be a gift into the trust.

What is the Quilter International Loan Trust?This guide is designed for you, the ‘settlor’, but may also be of interest to your trustees and legal personal representatives. Throughout this guide ‘Quilter International’ refers to Quilter International Isle of Man Limited.

Throughout this brochure, wherever we want to explain a particular term or draw your attention to a potential risk, we have highlighted them in boxes like this.

Trustee – The person who accepts the loan and applies for an investment bond and has responsibilities to administer the trust assets in accordance with the trust terms.

Settlor – The creator of the trust.

Guide to your Loan Trust4

How a loan trust works

The LoanThe first stage in the process is for you, as the settlor, to make an interest-free loan, repayable on demand, from your savings to your appointed trustees.

The trustees use the loan to invest in a Quilter International investment bond with the intention of achieving long-term capital growth. Quilter International has a selection of lump sum life assurance and redemption bonds which make suitable investment solutions for the Quilter International Loan Trust.

The investment is not guaranteed and can go down as well as up in value, depending on market performance.

Inheritance taxSince you have made a loan rather than giving your money away, the value of the loan will remain an asset in your estate when calculating any potential inheritance tax (IHT) liability. However, any growth achieved on the loan will be outside your estate.

Any repayment of the loan you request, whether in whole or in part, will (providing you spend the money) reduce the value of your estate.

As the settlor (the creator of the trust) your sole entitlement is to have your loan repaid to you. You are specifically excluded from benefiting from any growth achieved by the investment.

HM Revenue & Customs (HMRC) has confirmed that schemes set up on this basis do not create a gift with reservation (GWR) and are outside the scope of a pre-owned assets tax (POAT) charge.

The bare trustOne of the requirements for creating a bare trust is that you name your beneficiaries at outset. Your beneficiaries are the people who will benefit from the trust. These beneficiaries cannot be changed, regardless of any new circumstances, for example, the birth of a new grandchild where you have already named your existing grandchildren.

If one of your named beneficiaries dies before you, their heirs will benefit from their share of the trust assets.

Whilst the bare trust does not leave room to make any changes in the future, it does provide you with an element of certainty over who will eventually benefit from your trust.

From a taxation point of view this type of trust is subject to the potentially exempt transfer (PET) regime.

The Quilter International bondThe trustees have invested the money you lent them into a single premium bond; either a life assurance or redemption version. The initial premium will have been used to purchase units in investment funds, and it is these units that provide the potential for capital growth. Any investment growth will be outside your estate for IHT purposes and held for the beneficiaries of the trust.


Inheritance tax (IHT) – The estate of an individual domiciled in the UK is liable to UK IHT if its value exceeds the nil-rate bands and it is not left to an exempt person, e.g. a spouse, civil partner* or charity. The excess is taxed at 40%.* As defined by the UK Civil Partnership Act 2004.

Nil-rate band (NRB) – The first £325,000 in your estate is taxed at 0% for IHT purposes. This is known as the nil-rate band (NRB). Any assets above the NRB and not covered by the RNRB (see below) are liable to IHT at 40%.

Residence Nil-Rate Band (RNRB) – The residence nil-rate band is an additional nil-rate band available to your estate if you own a property and leave this to your children (including adopted, fostered or stepchildren) or grandchildren. It may also be available if you have downsized or sold your property since 8 July 2015. The amount is set by the government and is £175,000 in the 2021/22 tax year.

Domicile – Domicile is a concept of general law and is distinct from nationality or residence. Whilst it is possible to be resident in more than one country, it is not possible to be domiciled in more than one country at any given time. Generally speaking, but not always, this means that a person will be domiciled in the country in which they have their permanent home.

Gift with reservation – A gift with reservation of benefit is one that is not fully given away so that either:

the person receiving the gift does so with conditions or restrictions attached,

or the person making the gift withholds some benefit for themselves.

Where this happens to gifts made on or after 18 March 1986, the value of the assets are included as part of your estate but there is no seven-year limit as there is for outright gifts.

Pre-owned assets tax (POAT) – A yearly income tax charge, in circumstances where the taxpayers have successfully taken advantage of the IHT gifts with reservation rules, yet are still able to benefit from the assets transferred.

Potentially exempt transfer (PET) – An outright gift into a bare trust is regarded as a potentially exempt transfer (PET). The value of the gift will remain in your estate for IHT purposes for seven years from the date of the gift.


Settler – the loan and loan repaymentsYou can request regular withdrawals from the trust to supplement your income, or occasional withdrawals for a specific purpose. Repayments can be requested at any time and at any level, provided the amount requested is not over the outstanding loan amount. In total, you are only entitled to the repayment of the loan amount shown in the Quilter International Loan Trust deed you have completed.

Once the loan is repaid, any amount in the trust fund will be held on trust for the beneficiaries. It would therefore be prudent for your trustees to keep a record of the outstanding loan and any loan repayments made to you.

Regular repaymentsIf you would like the loan repaid in regular instalments, you can ask the trustees to start repayments immediately or at a later date. These repayments could be set up monthly, quarterly, half-yearly or yearly.

Occasional repaymentsYou can request a partial loan repayment from the trustees whenever you need the money.

Full repaymentYou can request a full repayment of the outstanding loan at any time.

Trustees – the loan and loan repaymentsThe trustees must act on any request from you, the settlor, to repay the loan in part or in full. As mentioned earlier, you can request repayments at any time.

Regular repaymentsIf you request regular repayments of the loan, these can be set up as automatic withdrawals from the bond which will be done by partially cashing in enough of the underlying investments across all the policies within the bond. These repayments will start immediately if this was requested by the trustees on the bond application form.

If you request that the regular repayments start at some point in the future, the trustees can ask Quilter International to set this up by completing the appropriate form and sending it to Quilter International.

It is advisable that the trustees keep ongoing records of the outstanding loan.

Occasional repaymentsThe trustees would pay any occasional requests for repayment of the loan by cashing in part, or all of one or more of the individual policies within the bond.

To do this they need to complete the relevant withdrawal form and send it to Quilter International. If there are no instructions about how the withdrawal from the bond should be made, Quilter International will partially cash in all policies within the bond to achieve the amount requested.

However, depending on the size of the repayment, for tax reasons a full surrender of individual policies may be more appropriate. Your trustees should discuss the different options with their financial adviser before taking any action.

Full repaymentYou can request that the trustees fully repay the loan at any time. To do this the trustees may have to fully cash in all policies within the bond. You need to be careful if you make this request soon after the bond is started as this could result in an early withdrawal charge which will reduce the value of the bond.

Investment performance may go down as well as up. If the value of the trust fund goes down, there may be inadequate funds to meet your demands for repayment of the loan. The trustees may have to meet any shortfall in relation to the outstanding loan from their personal resources. This also applies where the value is reduced by charges.

How a loan trust works (cont’d)


Risk warning – Throughout this document we refer to various methods of repayment. We strongly recommend that you seek financial advice before requesting any repayments as there may be an income tax consequence associated with this transaction.

If the value of the bond is less than the value of the outstanding loan when you request full repayment, the trustees are liable to pay any shortfall from their own personal resources.


Tax efficiency for youAs settlor, you are liable to pay any income tax on withdrawals from the bond while you are alive and a UK taxpayer. The trustees have the ability to take regular or occasional withdrawals from the bond to make any repayment of the loan you require, whether in full or in part.

Provided partial repayments do not exceed 5% each policy year of the original premium (or the cumulative total of these allowances), you will not be liable to income tax on the amount received at the time the payment is made to you – that liability will be deferred until the bond is fully cashed in.

If your repayments exceed 5% a year, the whole of the excess will potentially be subject to UK income tax.

Partial repayment of the loan can be for a specific amount or for an unspecified amount by fully cashing in a certain number of policies which comprise the bond. The tax calculation for these options is different and your trustees should speak to their financial adviser about the most appropriate method of withdrawal for your circumstances.

All growth will be free from UK IHT from the start.

Tax efficiency for the funds linked to the policyThe funds linked to the policy are free from capital gains and income tax, although withholding tax, which cannot be reclaimed, may apply on some investments.

ChoiceAccess to a wide range of Quilter International investment funds, managed by world-leading fund managers. The Quilter International contracts also provide access to an extensive choice of internal and external collective investment funds.

This allows the trustees to pick funds which appropriately maximise the potential for long-term capital growth for your beneficiaries while balancing this with the need to repay any outstanding loan to you. Most of the investments available are not guaranteed and can go down as well as up in value depending on market performance.

FlexibilityAccess to capital whenever the trustees need it by cashing in part, or all, of the policy/ies. The investment will automatically have been split into 12 separate policies (unless the trustees requested a different number of policies on the application form). They can then partially or completely cash in policies, without cancelling the entire bond, when receiving occasional requests from you to repay the loan. Taking money from the bond may also result in withdrawal and other charges applying to the product, as detailed in the Policy Terms and Charges Schedule (belonging to the trustees and not you, the settlor).

The ability to change the funds within their bond, as often as they require, taking advantage of market movements and maximising capital growth. An administration charge may apply depending on your charging structure and will be detailed in the Policy Terms and Charges Schedule.

To help them monitor the changing values of the bond, Quilter International send the trustees regular valuations. Currently, valuations can also be requested more frequently, or on an occasional basis, without incurring an extra charge.

Benefits of your loan trust being invested in our bondA Quilter International Bond gives your trustees choice, flexibility and tax efficiency.


Mr Brown is aged 50 and has substantial assets including a house worth over £550,000. He wishes to reduce his potential UK IHT liability and is prepared to use £150,000 to do so. However, ideally he would like to retain access to the capital, to supplement his income in the future.

His financial adviser recommends that he sets up a Quilter International Loan Trust (bare version). This arrangement allows him to set up a trust where he names his beneficiaries, as he knows who he would like to benefit. It also allows him to choose his trustees and lend them a capital sum while still retaining full access to the capital through repayments of the loan.

The trustees are then able to use the loan to invest in a single premium, whole life or redemption, bond. To ensure this investment can continue for as long as possible, they invest the loan in a Quilter International redemption bond.

Since the length of time a redemption bond can remain in force is 99 years, the trustees have more control over the timing of any surrender. The bond can be cashed in on request at any time* during the 99 year term.

Any growth on the loan would be outside Mr Brown’s estate for UK IHT.* our products are designed for medium to long-

term investment, so taking money out of your policy in the early years can dramatically reduce its potential for growth.

Mr Brown does not need access to the capital immediately, so waits to request a repayment of the loan until ten years later. He then asks the trustees to repay him £7,500 a year, payable monthly, which is within his 5% tax-deferred yearly allowance.

The trustees do this by setting up a regular monthly withdrawal from the Quilter International Portfolio Bond – redemption version payable to Mr Brown.

Unfortunately, Mr Brown dies eight years after he asked the trustees to start the regular loan repayments.

The part of the loan which hasn’t been repaid falls into Mr Brown’s estate for IHT purposes.

The beneficiaries of Mr Brown’s estate will therefore be liable to IHT on any amount in Mr Brown’s estate in excess of the then NRB and RNRB, including the amount of the outstanding loan. However, any growth on the outstanding loan is not part of Mr Brown’s estate and therefore is not liable to IHT on his death.Please note that this case study is entirely fictional and used for illustration purposes only.

How the trust works in practiceThe following fictional example shows how the Loan Trust works.

A Quilter International Loan Trust (bare version) allows Mr Brown to set up a trust where he names his beneficiaries, as he knows who he would like to benefit.


They can demand repayment of the outstanding loan in full then the cash can be distributed to Mr Brown’s heirs in accordance with his Will.

With the agreement of the heirs of Mr Brown’s estate, they can waive the rights to the outstanding loan in favour of the beneficiaries of the Quilter International Loan Trust. This would be classed as a transfer of value and treated as a PET for IHT from the heirs of Mr Brown’s estate. This amount would form part of those heirs’ estates for the next seven years. A draft deed is available from Quilter International.

Assign the right to repayment of the outstanding loan to one or more of the heirs of Mr Brown’s estate. This would be achieved by deed. The legal personal representatives need to obtain a deed and should seek legal advice before proceeding with this option.

Example

18 years after the Loan Trust was created, Mr Brown dies. The amount of the loan which has not been repaid is £90,000,

which means this will now fall into Mr Brown’s estate for IHT purposes.

Any growth in the bond will be immediately outside Mr Brown’s estate for IHT purposes.

10 years after the Loan Trust was created Mr Brown asks the trustees for repayment of the loan

of £7,500 a year, payable monthly.

The trustees invest ‘the loan’ in a Quilter International – International Portfolio Bond – redemption version.

Mr Brown, age 50, lends £150,000 and appoints trustees to a Quilter International Loan Trust (bare version).

How the trust works in practice (cont’d)The legal personal representatives of Mr Brown’s estate have three options available to them once probate is granted or letters of administration have been obtained, in respect of the outstanding loan:

Probate – When someone dies, the executors or administrators of the deceased (collectively known as the legal personal representatives) apply to the Court for authority to deal with the deceased’s estate. This authority is called ‘probate’ for executors and ‘letters of administration’ for administrators.

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2

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We have illustrated Mr Brown’s example in the graph opposite. It assumes an investment of £150,000 (the loan) and monthly regular repayments of 5% a year starting 10 years after the bond commenced. It also assumes investment growth at 5% a year and includes current bond and management charges.

However, you should note that this is not guaranteed as fund values can fall, which could result in the outstanding loan exceeding the fund value.

Value of outstanding loan

Years

Fund value

0

50,000

100,000

150,000

200,000

250,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

The value of the loan which has not been repaid at the time of Mr Brown’s death in year 18 will be in his estate for IHT purposes. However, by setting up the Loan Trust, he has reduced his IHT liability (assuming all of the value of the outstanding loan is above the NRB and RNRB at the time of his death) by £24,000.

IHT liability on the amount of the loan at outset:

£150,000 x 40% = £60,000.IHT liability on the amount of the outstanding loan at the time of death:

£90,000 x 40% = £36,000.The investment growth in this illustration amounts to £105,000 at the time of Mr Brown’s death. This will all be outside his estate for IHT purposes and will benefit his chosen beneficiaries.

Risk warning – If you do not spend your loan repayments, these will continue to be part of your estate for IHT purposes.


Am I, the settlor, automatically appointed as a trustee?Not automatically, but you can choose to name yourself as a trustee when completing the trust deed. Or, if you were not named in the trust deed at outset, you can be appointed as a trustee at a later date using a draft deed available from Quilter International.

Can I, the settlor, be the sole trustee?Yes, but this is not recommended for two reasons: firstly because if you are the sole trustee, there will be no one immediately available to administer the trust on your death and secondly because although it is perfectly possible to declare oneself as sole trustee, HMRC may question whether you can make a loan to yourself which may affect the IHT efficiency of the trust..

Can additional trustees be appointed in the future?Yes, additional trustees can be appointed at a later date.

Who can benefit from the trust?The parties you named as beneficiaries at outset.

Can the beneficiaries be changed?No, this is not possible under the bare trust.

Can my spouse/civil partner* benefit from the trust?Only if named in the trust deed as a beneficiary. To protect the IHT efficiency of the trust, the settlor must not be allowed to benefit from any distributions made to any beneficiairy..* as defined by the Civil Partnership Act 2004.

How often can I request that the trustees repay the loan?You can demand repayment of the loan at any time, in full or in part up to the amount of the original loan.

Can the trustees set up regular withdrawals to repay the loan?Yes, please see page six for more details.

What happens if the value of the bond is less than the value of the outstanding loan if I, the settlor, demand full repayment of the loan?The trustees will have to fund the shortfall from their personal assets unless you agree to waive repayment of this amount. If you waive the shortfall then this will be regarded as a gift and classed as a PET in your estate for IHT.

Can I still receive money from the trust once the trustees have repaid the loan?No, as you are specifically excluded from benefiting from the trust.

Can the trustees pay money to the beneficiaries even though the loan has not been repaid?Yes, but the trustees are liable to you, as the settlor, for the outstanding value of the loan.

Your questions answered


Can the trustees cash in the bond?Yes, and they can apply for a new or a different investment vehicle. This does not affect your right to repayment of the outstanding loan but may give rise to an income tax charge/liability.

What is the IHT position if a beneficiary dies before me, the settlor?The value of the trust fund minus the outstanding loan proportionate to that beneficiary’s share will form part of the beneficiary’s estate for IHT purposes. The deceased beneficiary’s share of the trust fund will pass to an heir of their estate in accordance with their Will.

Can the trust continue after my death?Yes, but the outstanding loan forms an asset of your estate.

Do the trustees have to repay the loan on my death?No, but the value of the loan is an asset of your estate. There are a number of options available to your legal personal representatives, see page ten for details of these options.

Can I waive all or part of the loan in the future?Yes, you can do this by deed. This would be classed as a transfer of value and be treated as a PET. Draft deeds are available from Quilter International, please contact your financial adviser.


The scheme operates globally, which means investors will benefit from this protection wherever they reside.

The Isle of Man scheme provides compensation of up to 90% of the policy benefit, in the unlikely event Quilter International becomes unable

to meet its liabilities. For the purposes of the scheme this is calculated as the policy value less any contractual charges associated with the policy. Please note that the scheme relates to the solvency of Quilter International, it does not extend to protecting the value of assets held within your policy.

Investors should be aware that the value of unit-linked contracts cannot be guaranteed as the price of units may fall as well as rise. Please remember that funds which hold investments in non-UK based currencies may rise and fall purely because of fluctuations in the exchange rate.

Certain investment income is subject to a non-reclaimable tax deduction at source in its country of origin.

The information in this document is based on Quilter International’s interpretation of UK law and HM Revenue & Customs practice as at March 2021. While we believe this interpretation is correct, we cannot guarantee it.

Tax relief and the tax treatment of investment funds may change.

The value of any tax relief will depend on the investor’s financial circumstances. We cannot accept responsibility for any losses arising from actions taken as a result of the information contained in this document.

Policyholder protectionThe Isle of Man has a statutory compensation scheme for all life assurance companies based on the Isle of Man.

Further informationDetails of the range of contracts that are suitable for the Quilter International Loan Trust can be found in our brochures, Key Features documents and Policy Terms. These are available from any Quilter International regional office.

Business unit name goes here 15

www.quilterinternational.com Calls may be monitored and recorded for training purposes and to avoid misunderstandings.

Quilter International Isle of Man Limited is registered in the Isle of Man under number 24916C. Registered and Head Office: King Edward Bay House, King Edward Road, Onchan, Isle of Man, IM99 1NU, British Isles. Tel: +44 (0)1624 655 555. Fax: +44 (0)1624 611 715.

All promotional material is approved by Old Mutual Wealth Limited. Old Mutual Wealth Limited is authorised and regulated by the Financial Conduct Authority. Financial Services register number 165359.

The rules made under the Financial Services and Markets Act 2000 (as amended) for the protection of retail clients in the UK do not apply.

Licensed by the Isle of Man Financial Services Authority.

Quilter International is registered in the Isle of Man as a business name of Quilter International Isle of Man Limited.

5906/INT21-0080/March 2021

guide to your loan trust - quilter international · 6 guide to your loan trust settler – the loan...

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