Inheritance Tax (IHT) is a growing concern for families looking to preserve their wealth across multiple generations. When assets are passed directly through gifting, estates often become inflated, leading to increased tax burdens. Additionally, outright gifts carry risks such as divorce, where a portion of the wealth could be lost, as well as bankruptcy and care fee assessments, which may expose assets to external claims.

A highly effective solution is for Trusts to loan, rather than gift, funds to Beneficiaries. This strategy allows Beneficiaries to access capital when needed while ensuring that the assets remain protected within the Trust structure. Loans offer flexibility, as they can be interest-free or interest-bearing, with or without a repayment schedule, at the discretion of the Trustees. Crucially, because loans remain a Trust asset and a debt of the Beneficiary, they are not included in the Beneficiary’s taxable estate, helping to reduce their overall IHT liability.

Upon the Beneficiary’s passing, the outstanding loan is treated as a debt against their estate, lowering the IHT and Residence Nil Rate Band (RNRB)-assessable value. The loan is then repaid to the Trust, allowing Trustees to re-loan funds to the next generation. This process can continue for the full 125-year perpetuity period of the Trust, spanning multiple generations to ensure long-term financial protection.

Another significant advantage of loaning funds instead of gifting is the ability to mitigate Exit Tax Charges. Since the loan remains an asset of the Trust, it is not considered an “exit” of funds, meaning that no proportionate Exit Tax Charge applies. Furthermore, by preventing the ‘bunching’ of assets in successive generations’ estates, loans reduce the cumulative tax burden and help safeguard family wealth.

Key Benefits of Loaning Over Gifting:

Protects Against Divorce & External Claims – Ensures wealth remains within the family. IHT Efficiency – Reduces the Beneficiary’s taxable estate, minimising IHT exposure. Sustains Intergenerational Planning – Enables wealth preservation typically for up to five generations. Trustee Oversight – Maintains financial discipline and strategic asset management. Avoids Exit Tax Charges – Retains funds within the Trust, preventing unnecessary taxation.

By implementing a loan-based approach, families can secure their wealth for future generations while maintaining flexibility, control, and long-term tax efficiency. This method not only minimises risk but also ensures responsible estate planning that benefits both current and future Beneficiaries.

Once assets are removed from a Settlor’s IHT-assessable estate, Financial Planners should do their best to keep those assets out of the Beneficiaries IHT-assessable estate. Once it’s out, keep it out!