Both Discounted Gift Trusts and Loan Trusts are used to reduce inheritance tax. But, each trust has its own tax reduction mechanisms, rules and considerations.
In this short article, we discuss the differences and offer an overview of Discounted Gift Trusts and Loan Trusts.
Comparing Discounted Gift Trusts Vs. Loan Trusts
If you’re currently looking into how to plan for and reduce your inheritance tax position, understanding about the different options is essential.
Before we get started, it’s important to note this article is for educational purposes and doesn’t reflect and personal opinions or recommendations.
Discounted Gift Trusts
With a Discounted Gift Trust, you give money to the trust. You keep the right to receive fixed withdrawals, but the rest is passed on.
Part of the gift is immediately outside your estate, thanks to the discount applied. After seven years, the rest may be excluded too.
If you want to go deeper into the practical detail, including tax treatment and suitability, take a look at our full guide on how a Discounted Gift Trust works in practice.
Lastly, for the legal and compliance side, see Do I need to register a Discounted Gift Trust, which covers HMRC rules, deadlines, and who’s responsible for registration.
Loan Trusts
In a Loan Trust, you don’t give the money away; you loan it to the trust. You can request repayments from the trust until your full loan is returned. The original loan stays in your estate, but the growth is immediately outside.
This structure appeals to those who want inheritance tax planning benefits but still need flexibility. Since you retain access to the loaned capital, it offers peace of mind.
The trust can invest the funds, and any investment growth escapes future inheritance tax. As a result, this makes Loan Trusts particularly useful for long-term planning without fully relinquishing control.
Lastly, trustees manage the investment and can distribute growth to your beneficiaries later.
Loan trust and the seven year rule
With a Loan Trust, the seven year gifting rules do not apply to the original loan, as it isn’t a gift.
However, any investment growth falls outside your estate immediately, making it a useful option for gradual inheritance tax reduction over time.
Summary
If control matters to you, a Loan Trust offers more. You can reclaim your loan, which gives peace of mind. But if you’re confident you won’t need the capital again, a Discounted Gift Trust may provide a better inheritance tax planning outcome.
- A Discounted Gift Trust involves making a gift to a trust and maintaining a fixed income,
- Also, you are gaining immediate inheritance tax relief on the discounted portion
- Loan Trusts work by lending money to a trust instead of gifting it, allowing full access to the original loan while growth sits outside your estate
- Both structures often use investment bonds and are designed to reduce inheritance tax over time
- DGTs suit those in good health who do not need access to the capital, while Loan Trusts offer more control and flexibility
- Choosing the right option depends on your financial goals, need for access, and comfort with giving up control over capital permanently
In short:
DGT = gift with partial inheritance tax benefit now.
Loan Trust = loan with full access, but slower inheritance tax effect.
Exploring other trust options for inheritance tax planning
If you’re still weighing up the right approach, take a look at our guide to types of trust for inheritance tax planning. It covers Discounted Gift Trusts, Loan Trusts, and Flexible Reversionary Trusts, each offering different levels of control, flexibility, and tax efficiency.
FAQs
With a Discounted Gift Trust, you can only receive the fixed income you agreed to at the start. On the other hand, with a Loan Trust, you largely get more flexibility. In summation, this allows you to withdraw your original loaned capital.
A Discounted Gift Trust can reduce the value of your estate more quickly due to the discount. Loan Trusts take longer but offer greater access and may suit people who want to keep control. Lastly, we can’t with and form of credibility state, which is better. The devil is in the details, and each person’s case is unique.
Yes, in most cases. Both Discounted Gift Trusts and Loan Trusts are typically built around investment bonds, either onshore or offshore, depending on the structure chosen and inheritance tax planning goals.
A Loan Trust gives you access to your capital, which some see as safer. With a Discounted Gift Trust, the capital is locked in, so access is not possible once it’s been set up. Of course, we need to caveat this by saying, each case is unique, and the above is an overview of considerations.
No, unfortunately not, you cannot transfer from one to the other. Each trust type is legally distinct. If your needs change, the original trust must be closed and a new one created. In an ideal world, this would be possible; however, the rules are the rules.