Loan trusts and discounted gift trusts with an offshore bond
Both trusts let a UK family move the growth on an offshore bond out of their estate while keeping access to their own capital. In a loan trust you lend the money to trustees; HMRC accepts an interest-free loan repayable on demand is not a transfer of value and not in itself a gift with reservation (IHTM14317). In a discounted gift trust you give the bond but keep a fixed stream of payments; the gift is the premium less the value of the rights you keep (IHTM20652), and that value depends on your age and health. On a £2,000,000 bond, the hypothetical examples below show inheritance tax savings of £600,000 to £863,000 for a loan trust after 15 years and £320,000 to £800,000 for a discounted gift trust, depending on when death occurs. Gains stay taxable on you while you are alive and UK resident, then on UK trustees at 45% with no top-slicing relief.
Written for trusts governed by the law of England and Wales, on UK law and HMRC guidance as at 23 September 2026 (tax year 2026/27). The figures are hypothetical, with the arithmetic set out.
Why these trusts are built around a bond
Without a trust, a bond you own is in your estate for inheritance tax, at 40% above the nil-rate bands, once you are long-term UK resident. Giving it away outright solves that only if you can live without the money. Loan trusts and discounted gift trusts exist for people who want the growth to leave the estate but need to keep an income or their capital.
An offshore bond is usually the asset inside them, mainly because:
- It produces no annual income for the trustees to account for. Growth rolls up inside the policy and tax is deferred until a chargeable event (ITTOIA 2005 Part 4 Chapter 9).
- Withdrawals of up to 5% a year of the premium, cumulatively, are tax-deferred. That fits loan repayments and the fixed payments of a discounted gift trust.
- Bonds are issued in segments. Trustees can later assign segments to a beneficiary as a gift, which is not a chargeable event (s.484), and the beneficiary can then surrender them at their own tax rates with top-slicing relief.
The inheritance tax result comes from the trust, not from the bond. The ordinary rules still apply: the seven-year rule, the 20% lifetime charge above the nil-rate band on gifts into a discretionary trust, ten-yearly charges of up to 6%, exit charges and the gift with reservation rules. For how the trusts fit alongside wills, gifts and the residence nil-rate band, see inheritance tax and succession.
The loan trust
How it works
- You set up a trust, usually discretionary, for your family. You are excluded from benefit.
- You lend the trustees a sum, say £2,000,000, interest free and repayable on demand. The trust deed and a loan agreement record the terms.
- The trustees invest the loan in an offshore bond on your life or on other lives.
- The trustees repay the loan to you when you ask, often by taking 5% withdrawals from the bond each year.
- Growth on the bond belongs to the trust. The outstanding loan remains yours.
What HMRC says
HMRC's manual deals with this at IHTM14317. An interest-free loan repayable on demand “is not a transfer of value (because the value of the right to repayment of the loan is equal to the amount of it)”, and it is “not, in itself, a GWR”, a gift with reservation. HMRC does regard the interest you forgo as a gift in the ordinary sense, and it points to separate rules for loans to settlements.
The result is that setting up the trust uses none of your nil-rate band and triggers no 20% entry charge, however large the loan. The outstanding loan is an asset of your estate. What has left it is the growth.
Anything the trustees repay comes back into your estate unless you spend it or give it away. Repayments you save simply rebuild the estate, and this is easy to overlook. The loan trust works best for someone who will spend the repayments, typically as income in retirement.
M&G's technical guide notes that the loan can be waived in part or in full at any time, usually by deed, and that “any amount of the loan that is outstanding when the settlor dies forms part of their estate” (M&G loan trust facts). A waiver is a gift to the trust, with the inheritance tax treatment of any other gift to that trust.
Worked example: £2,000,000 over 15 years
Assumptions, all hypothetical: the bond grows at 5% a year after charges; you are long-term UK resident; your other assets already use your nil-rate bands, so every extra pound in your estate is taxed at 40%; there are no earlier gifts. Two versions: in A you take nothing back; in B the trustees repay £100,000 a year (5% of the loan) and you spend it.
| A: no repayments | B: £100,000 a year repaid and spent | |
|---|---|---|
| Bond value after 15 years | £2,000,000 × 1.05^15 = £4,157,856 | £2,000,000 (growth each year equals the withdrawal) |
| Loan repaid to you | £0 | £1,500,000 (15 × £100,000) |
| Loan still owed to you, in your estate | £2,000,000 | £500,000 |
| Trust's value outside your estate | £2,157,856 | £1,500,000 |
| In your estate if you had held the bond yourself | £4,157,856 | £2,000,000 |
| Inheritance tax saved at 40% | £863,142 | £600,000 |
Version B shows what the structure is usually for: the withdrawals act as an income, and the part of the loan you have spent is gone from both calculations. In both versions the saving comes from growth and spending, not from any discount. If the bond falls in value, the trust owes you the loan anyway and there is nothing to save.
The ten-year charge on a discretionary loan trust
A discretionary loan trust is a relevant property trust. At each ten-year anniversary the trustees pay a charge of three tenths of the effective rate on a notional lifetime transfer (IHTA 1984 s.66(1)), which gov.uk describes as up to 6% (Trusts and Inheritance Tax). M&G's guide says the assessable amount is “the bond value at the relevant date, less the outstanding loan”. A simplified calculation, ignoring the settlor's earlier gifts and any other trusts:
| A: no repayments | B: £100,000 a year repaid | |
|---|---|---|
| Bond value at year 10 | £3,257,789 | £2,000,000 |
| Less outstanding loan | £2,000,000 | £1,000,000 |
| Relevant property | £1,257,789 | £1,000,000 |
| Notional tax at 20% above £325,000 | £186,558 | £135,000 |
| Effective rate | 14.83% | 13.50% |
| Ten-year charge rate (3/10) | 4.45% | 4.05% |
| Charge payable by trustees | £55,967 | £40,500 |
The trustees would usually pay the charge by a part surrender, which can itself produce a chargeable event gain taxed on you if it takes cumulative withdrawals above the 5% allowance. The trustees must report the anniversary on form IHT100 and pay by the end of the sixth month after it.
The discounted gift trust
How it works
- You pay a single premium into a bond held by trustees, say £2,000,000.
- At the outset you carve out a right to fixed payments for the rest of your life, commonly set at or below 5% of the premium a year, for example £100,000.
- The rest of the bond, including all future growth, is held for your beneficiaries. It can be an absolute (bare) trust, where the beneficiaries are fixed, or a discretionary trust.
- When you die, the payments stop and the retained rights have no value. The trust fund passes to the beneficiaries.
The payments are fixed at the start. M&G describes the arrangement as “relatively inflexible; payment stream can't be changed” (M&G: what is a discounted gift trust).
What HMRC says about the discount
HMRC accepts that the retained rights are carved out, so the arrangement is not a gift with reservation. The gift is a transfer of value measured by the loss to your estate under IHTA s.3(1): the amount invested less the open market value of the rights you keep (IHTM20652).
That open market value is what a buyer would pay for a stream of £100,000 a year for your life. It depends, in HMRC's words, on “age, gender, state of health (and insurability)”, with “the purchaser's required yield” and “the mortality base” (IHTM20426). HMRC's preference is that full underwriting should be carried out before the trust is effected, to the standards required for whole of life assurance (IHTM20655). If your life was uninsurable at the date of the gift, the retained rights are worth only a nominal amount and there is in effect no discount (IHTM20427).
The discount comes from a valuation made on your medical evidence at the start. Nothing on this page predicts what yours would be.
Worked example: £2,000,000 with an illustrative discount
Assumptions, all hypothetical: premium £2,000,000; fixed payments £100,000 a year, spent as they are received; the bond grows at 5% a year so its value stays near £2,000,000; your other assets already use the nil-rate band, so every extra pound is taxed at 40%. The discount of £800,000 is illustrative only. A real figure comes from the insurer's underwriting of your age and health and is not guaranteed; it may be much lower, or nil.
| Item | Figure |
|---|---|
| Premium | £2,000,000 |
| Illustrative value of rights you keep (the discount) | £800,000 |
| Gift for inheritance tax: £2,000,000 less £800,000 | £1,200,000 |
| Immediate tax, absolute trust (potentially exempt transfer) | £0 |
| Immediate tax, discretionary trust: (£1,200,000 less £325,000) × 20% | £175,000 if the trustees pay |
The discretionary version carries a lifetime charge because the gift exceeds the nil-rate band. The usual ways to avoid it are to keep the gift within the available nil-rate band, or to use an absolute trust and accept that the beneficiaries are fixed from the outset.
For the absolute trust, the table below compares the inheritance tax on death with holding the same bond yourself. When a gift fails because you die within seven years, it uses your nil-rate band first; so the rest of your estate pays 40% on an extra £325,000 (£130,000), and the gift above the band is taxed at the rate the taper table gives (gov.uk: gifts).
| Death | Rate on gift above the band | Tax: £130,000 + (£875,000 × rate) | Bond held personally: £2,000,000 × 40% | Saved |
|---|---|---|---|---|
| Within 3 years | 40% | £480,000 | £800,000 | £320,000 |
| 3 to 4 years | 32% | £410,000 | £800,000 | £390,000 |
| 4 to 5 years | 24% | £340,000 | £800,000 | £460,000 |
| 5 to 6 years | 16% | £270,000 | £800,000 | £530,000 |
| 6 to 7 years | 8% | £200,000 | £800,000 | £600,000 |
| 7 years or more | 0% | £0 | £800,000 | £800,000 |
The discount is effective from day one: even on death in the first year, only £1,200,000 is charged, not £2,000,000. And growth on the bond is outside your estate from the start, which this table ignores because the bond's value is held flat by the payments. If you save the £100,000 a year instead of spending it, it rebuilds your estate and the saving shrinks.
Who pays income tax on the gains
The trust changes who owns the bond. It does not stop chargeable event gains. ITTOIA 2005 s.465 charges the individual who created the trust where the rights are held on non-charitable trusts. HMRC's guide to the rules is at IPTM3250.
| Situation | Who is taxed | At what rate |
|---|---|---|
| Settlor alive and UK resident | The settlor (s.465) | Settlor's own rates, 20%, 40% or 45% in 2026/27, with top-slicing relief |
| Settlor dead, or non-UK resident, and UK resident trustees | The trustees (s.467) | Trust rate, 45% on non-dividend income in 2026/27; no top-slicing relief |
| Bare (absolute) trust | The beneficiary, as the person absolutely entitled (s.465(2)) | Beneficiary's own rates, with top-slicing relief |
| Non-UK resident trustees | Treated as income of the trustees (s.468; IPTM3260); the transfer of assets abroad rules can attribute it to UK residents | Depends on who is charged |
In a bare discounted gift trust the settlor also holds rights, and M&G's guide says gains are then attributed “in accordance with their share of the rights on a just and reasonable basis”. The rate for trustees is on gov.uk: discretionary and accumulation trusts pay 45% on “all other income” and 39.35% on dividend-type income (Trusts and Income Tax). Top-slicing relief is “only available to individuals. It is not available to companies, trustees or personal representatives” (IPTM3820). There is no basic-rate credit on an offshore bond, whoever is taxed.
In practice this means:
- While you are alive and UK resident, a gain on a loan trust or discretionary gift trust bond is taxed on you, even though you cannot benefit from the trust. Plan the trustees' surrenders with your tax position in mind.
- After your death, surrendering in the trustees' hands costs 45% of the gain. Assigning segments to a beneficiary first is usually cheaper, because the gift assignment is not a chargeable event and the beneficiary is taxed at their own rates with top-slicing relief. From a discretionary trust, that assignment is an appointment of trust property and can bring an exit charge of up to 6%.
How gains and top-slicing are worked out is covered in chargeable event gains and top-slicing relief, and the 5% rule in the 5% withdrawal allowance.
The 5% withdrawals: loan repayments and fixed payments
Both trusts lean on the 5% allowance. On a part surrender, the allowable element builds up at one twentieth of each premium for each insurance year, for up to twenty years (s.507). Withdrawals within the cumulative allowance produce no gain at the time.
They are tax-deferred, not tax-free. Every pound taken out is brought back into account when the bond is finally surrendered or ends on death, and the gain is calculated then. In a loan trust the repayments reduce the bond, so the final gain on surrender falls on whoever is chargeable at that time. A family that takes 5% for twenty years has used the whole allowance; anything further is an excess, taxed as a gain in that insurance year.
Registering the trust and reporting
A trust holding an investment bond must register on the Trust Registration Service. HMRC's manual excludes trusts holding only policies that pay out on death, illness or disablement, but notes that investment bonds are designed to pay out through surrenders during the term, so a trust holding one does not qualify for the exclusion (TRSM23030). For a non-taxable trust created after 6 October 2020, registration is due within 90 days of creation (gov.uk: register a trust).
The insurer issues chargeable event certificates for any gain and reports the policy under the Common Reporting Standard. What goes where is set out in what HMRC learns about an offshore policy.
Where these trusts do not help
- They do not remove inheritance tax on the capital you keep. The outstanding loan, and payments you receive and save, stay in your estate.
- A discounted gift trust for someone in poor health, or uninsurable, gives little or no discount.
- Payments from a discounted gift trust cannot be increased if your needs change.
- A discretionary trust pays ten-year and exit charges, and the lifetime charge on a gift above the nil-rate band.
- A trust set up by a long-term UK resident holds relevant property wherever the bond is issued. How long-term residence works, and what happened to excluded property trusts, is explained in inheritance tax on an offshore bond after April 2025.
- The bond inside the trust must still avoid the personal portfolio bond rules. Trustees who choose individual assets outside the permitted categories, or instruct a manager to, face a deemed gain each year of 15% of premiums plus earlier deemed gains (the personal portfolio bond rules).
Loan trusts and discounted gift trusts: questions
Is a loan to a loan trust a gift for inheritance tax?
No. HMRC's manual says an interest-free loan repayable on demand is not a transfer of value, because the right to repayment is worth the amount lent, and it is not in itself a gift with reservation (IHTM14317). The loan stays in your estate; growth on the bond held by the trustees does not.
Can I get my money back from a loan trust?
Yes, the loan is repayable on demand. Trustees often repay it through 5% withdrawals from the bond. Repayments come back into your estate unless you spend or give them away, so the trust works best for someone who will use the repayments as income.
How is the discount on a discounted gift trust worked out?
The gift is the premium less the open market value of the payments you keep (IHTM20652). That value depends on your age, gender, health and insurability (IHTM20426), and HMRC expects full underwriting before the trust starts (IHTM20655). If you were uninsurable at the time, there is in effect no discount (IHTM20427). No discount is guaranteed.
What happens if I die within seven years of setting up a discounted gift trust?
The gift, which is the premium less the discount, is brought back into account. It uses your nil-rate band first, and if you survived at least three years, taper relief applies: the tax on the part above it is charged at 32% for a gift made 3 to 4 years before death, then 24%, 16% and 8% for a gift made 6 to 7 years before death. The discount itself and the growth on the bond are not taxed in your estate; payments you receive and save are.
Who pays income tax on gains from a bond in trust?
While the settlor is alive and UK resident, the settlor (ITTOIA 2005 s.465). After the settlor's death, or if the settlor is non-resident, UK resident trustees are taxed at the trust rate of 45% in 2026/27, with no top-slicing relief (s.467; IPTM3820). For a bare trust, the beneficiary is taxed.
Do discretionary loan trusts pay ten-year charges?
Yes. The charge is three tenths of the effective rate on a notional lifetime transfer, so at most 6% (IHTA s.66). M&G's technical guide says the assessable amount is the bond value less the outstanding loan. In our hypothetical £2,000,000 example the year-10 charge was £40,500 to £55,967.
Does a trust holding an offshore bond need to register with HMRC?
Yes. The exclusion for trusts holding pure protection policies does not cover investment bonds, which pay out through surrenders during their term (TRSM23030). A non-taxable trust created after 6 October 2020 must register within 90 days of creation.
Are the 5% withdrawals from the trust bond tax-free?
No. They are tax-deferred. Withdrawals within the cumulative 5% allowance produce no gain when taken, but they are counted when the bond is finally surrendered or ends on death, and the gain is taxed then on whoever is chargeable at that time.
Sources and authorities
HMRC inheritance tax manual: IHTM14317 (interest-free loans); IHTM20652 (discounted gift schemes); IHTM20426, IHTM20427 and IHTM20655 (valuing retained rights, uninsurable settlors, underwriting). Statute: IHTA 1984 s.66; ITTOIA 2005 s.465, s.467, s.484 and s.507. HMRC insurance manual: IPTM3250, IPTM3820. Trust registration: TRSM23030; gov.uk: register a trust. Rates: Trusts and Income Tax; Trusts and Inheritance Tax; gifts and taper relief. Secondary, for practice points only: M&G loan trust facts; M&G discounted gift trust guide.
Research checked 23 September 2026 against the statutes and HMRC guidance linked above, in line with our editorial standards.
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