The Gibraltar Loan Trust: Inheritance Tax mitigation for UK expats

Inheritance Tax (IHT) is a major consideration for many non-UK resident individuals who were previously long-term UK residents, as well as for their professional advisors and financial advisors. For those looking to balance access to capital with long-term tax efficiency, the Sovereign Gibraltar Loan Trust provides an innovative and practical solution.

The challenge of IHT Estate Planning

Reducing a potential IHT liability generally requires the individual or couple to make lifetime gifts of capital to lower the value of their taxable estate. However, many clients find outright gifts impractical because they involve giving up access to the capital and income of the gifted asset from which they might need to benefit in the future.

For clients who want to retain control over their capital while benefiting from IHT savings, the Sovereign Loan Trust offers a flexible and compliant approach. By using a Loan Trust, the individual or couple can achieve a gradual reduction in their estate for IHT purposes, ensure that any growth in the value of the invested cash is outside of their estate while still retaining access to their original capital.

How the Sovereign Gibraltar Loan Trust works

1. Establishing the Trust
   • The Gibraltar Loan Trust is initiated with a nominal gift, typically around £100, from the non-UK resident settlor. This gift will be covered by the annual IHT exemption (up to £3,000 in each tax year), ensuring there are no immediate tax implications.
   • A loan agreement is then executed with the trustees and the funds, which constitute the bulk of the trust’s value, are transferred to the trustees as a loan. To avoid any negative IHT consequences, the loan is specified to be interest free and repayable on demand. The trustees then invest the funds in an investment bond (life policy) and hold the bond as a trust asset.
   • Under an ‘absolute’ Loan Trust, there will be a named beneficiary or beneficiaries entitled to the residual fund. A ‘discretionary’ Loan Trust offers more flexibility to the trustees to decide which of the potential beneficiaries should benefit, taking into consideration any guidance in the settlor’s ‘letter of wishes’.
2. Key tax benefits
   • Importantly, the IHT ‘gift with reservation’ (GWR) rules should not apply to Loan Trusts because the settlor’s right to have their loan repaid should not amount to a reservation of benefit. Their right to repayment is in their separate capacity as a creditor rather than a settlor.
   • The growth of investments within the investment bond is excluded from the settlor’s taxable estate for IHT purposes, provided they are excluded as a beneficiary of the trust.
   • If the settlor requests a repayment of part of the loan, the trustees can make a partial withdrawal from the bond and repay the amount requested. Over time, the outstanding loan can therefore be reduced through repayments, further diminishing the taxable estate (assuming the loan repayments are not reinvested in assets which have value).
   • Once all the loan has been repaid, the remainder of the trust fund can be passed to the trust beneficiaries.
3. Flexibility in access to capital
   • If the settlor no longer requires the full loan amount, he / she can assign the remaining loan balance to family members. This gift will be classified as a potentially exempt transfer (PET) and will therefore become IHT-free after seven years.

Why choose the Sovereign Gibraltar Loan Trust?

1. Succession Planning
   • The Sovereign Loan Trust Planning retains capital in a trust structure for future generations, avoiding the need for probate in relation to the assets settled in that trust. The settlor should ensure that the loan is included in their Will given that the loan will form part of their free estate subject to the laws of succession.
2. Tax Planning
   • The Sovereign Loan Trust is ideally suited for expats who are likely to remain long-term UK residents. Under the UK’s new IHT regime (effective from 6 April 2025), an individual who is long-term will generally retain this status for 10 tax years after cessation of UK residence.
3. Global applicability
   • Individuals with global, cross-border tax concerns can benefit from the trust’s structure, provided they seek local advice.

Who should consider a Gibraltar Loan Trust?

This strategy is particularly beneficial for:

• Business Owners – those with significant assets who want to reduce IHT exposure while retaining access to their capital.
• Tax Advisors and Accountants – professionals advisors seeking compliant and innovative solutions for their clients’ estate planning.
• IFAs – Independent financial advisors managing clients’ portfolios and exploring flexible tax-efficient investment structures.

Final Thoughts

The Sovereign Gibraltar Loan Trust is a tried and tested method for non-UK resident individuals to undertake a degree of lifetime IHT planning with their investment and achieve a gradual reduction of their estate without losing access to the funds available for investment, as well as leaving a residual fund for their beneficiaries after their death.

The Sovereign Gibraltar Loan Trust strikes a highly effective balance between IHT savings and capital accessibility, making it a powerful tool for clients and their advisors. While HMRC’s current stance supports this approach, customised tax advice is essential to assess individual circumstances, potential risks and cross-border complexities.

If you are ready to explore how the Gibraltar Loan Trust could benefit you or your clients, contact Sovereign for tailored advice and assistance in structuring a compliant solution that will help in realising financial goals.