Freezer Trust IHT UK: How It Works, Loan Trusts, Discounted Gift Trusts, and IHT Planning (2026)
A freezer trust locks your estate value in place for IHT while future growth escapes into the trust for your family. A loan trust freezes via a repayable loan; a discounted gift trust gets part out immediately via an actuarial discount. Neither removes the whole sum from your estate at once.
| Feature | Loan Trust | Discounted Gift Trust (DGT) |
|---|---|---|
| What is it? | The settlor lends a sum of money (typically interest-free) to a trust. The trust invests the loan. The loan is repayable to the settlor (or their estate on death) on demand. There is no gift at outset — only a loan. | The settlor makes a payment to a trust in return for a series of regular payments back (an 'income stream' for life). The trust invests the remaining capital. The amount paid in = a gift to the trust, less an actuarial discount (the present value of the expected payment stream back to the settlor). |
| What goes into the estate (IHT exposure)? | The outstanding loan balance is in the estate as an asset (the loan is owed to the settlor's estate). If loan is £300k and has not been repaid: £300k is in the estate for IHT. The loan is 'frozen' — it does not grow with investment returns. Future growth above the loan amount accrues in the trust, outside the estate. | The actuarial discount (present value of the payment stream) is IMMEDIATELY outside the estate at outset. The balance of the payment into the trust (the gift element = total payment less discount) is a PET or CLT. If a PET: it is outside the estate after 7 years. If a CLT (discretionary trust): immediate 20% IHT above NRB; then outside the estate after 7 years. |
| What goes outside the estate? | ALL growth on the trust's investments above the outstanding loan balance is outside the estate. Example: settlor lends £200k; trust grows to £350k over 10yr; estate includes £200k loan; £150k growth is outside the estate. If settlor uses loan repayments (draws down the loan), the loan balance reduces: each repayment reduces the estate exposure, but the repayment is received as capital (not income — no income tax on loan repayment itself). | The discount is immediately outside the estate. The gift element (PET/CLT) is outside the estate after 7 years. All future growth on the entire trust fund (not just above a loan balance) accrues outside the estate from the start. |
| IHT on death — loan trust | Estate includes the outstanding loan balance at date of death. Growth above the loan is in the trust for beneficiaries — outside the estate. The loan trustees pay back the loan to the estate. The estate pays IHT on the loan balance (plus other estate assets). After IHT, the loan repayment goes to residuary beneficiaries under the will. | On death: the payment stream ceases (no more regular payments). The remaining trust fund is held for the trust beneficiaries outside the estate. The only potential IHT is if the gift element (less discount) was a PET or CLT made within 7 years of death — drawn back under PET rules. The discount is permanently outside the estate. |
| Trust type and relevant property regime | The trust can be bare (resulting in a PET of the loan at outset — but a bare trust loan trust is unusual) or more commonly a discretionary trust. Discretionary trust: subject to relevant property regime (s58 IHTA); periodic charge (s64 IHTA) at 10yr anniversary (on trust value ABOVE outstanding loan — the growth element); exit charge (s65 IHTA) on distributions. The outstanding loan is excluded from the periodic charge base (it is not 'relevant property' — it is a liability owed by the trust to the settlor). | Typically a discretionary trust (relevant property regime applies — periodic charge s64; exit charge s65). The trust's full fund (not reduced by a loan) is subject to the periodic charge. The actuarial discount reduces the initial gift below the NRB in many cases — minimising or eliminating the immediate CLT charge. Growth over NRB over 10 years: periodic charge arises. |
| Tax on regular payments / withdrawals | Loan repayments to settlor: capital — no income tax on the repayment of principal. Growth drawn from the trust as distributions: taxed as income (discretionary trust rate 45% income tax) or capital gain (trust CGT rate 20%). Trust tax: discretionary trust income subject to 45% trust income tax rate; settlor-interested trust rules may apply if settlor can benefit. | Regular payments to settlor: combination of capital and return of investment — taxed according to the underlying product (typically an insurance bond within the trust; '5% rule' allows up to 5% annual withdrawal of the original investment tax-deferred under ITTOIA 2005 s499; top-slicing relief for bonds). Specialist advice required on the tax treatment of the income stream. |
| When is it suitable? | Suitable for: people who cannot afford to make outright gifts (they need access to capital through loan repayments); those who want to freeze their estate value without losing access to capital; older individuals where a 7-year PET clock is uncertain. Main benefit: the estate stops growing from the moment the loan trust is established (growth is outside the estate from day 1). | Suitable for: people with a lump sum they can invest and who want regular income for life (NOT flexible capital access); those willing to make an immediately discounted estate reduction (the discount); those with a life expectancy where the actuarial discount is material (younger and healthier individuals get larger discounts). NOT suitable: those who may need access to the capital flexibly (the payment stream is fixed). |
| Key risks / limitations | If the settlor draws down the loan to extinction (all repaid), the loan is gone from the estate — but so is the access to the capital. Interest-free loans: HMRC watches for artificial arrangements; the trust must genuinely invest and the loan must be genuinely repayable. Trust investments: value can fall below the loan balance — leaving the estate holding a worthless claim against a depleted trust. Death within 7yr of a discretionary loan trust setup: initial gift (if any excess above NRB on setup) is a CLT. | The income stream is fixed and irrevocable — the settlor CANNOT access capital above the fixed payments. If the settlor's health deteriorates rapidly: the actuarial discount may be challenged by HMRC if the actual survival period was far shorter than expected (anti-avoidance). IHT anti-avoidance provisions apply. Actuarial discount is based on standard mortality tables — not the individual's actual health — which can produce unfair results either way. |
Freezer trust IHT UK 2026. Loan trust: settlor lends money to trust at outset; no gift; loan repayable on demand; loan = estate asset (frozen at original amount); growth above loan = outside estate. Relevant property regime (s58 IHTA 1984) applies if discretionary trust: periodic charge (s64 IHTA) at 10yr anniversary on trust value ABOVE outstanding loan (loan = trust liability deducted from periodic charge base); exit charge (s65 IHTA) on distributions (n/40 formula). Discounted gift trust (DGT): settlor pays lump sum; receives fixed regular payments for life; actuarial discount = PV of expected payments = immediately outside estate; balance = PET (s3A IHTA — to bare/absolute trust) or CLT (to discretionary trust — immediate 20% IHT above NRB). DGT periodic charge: full trust fund (no loan deduction). 5% withdrawal rule for insurance bonds: ITTOIA 2005 s499 — up to 5% per year of original premium tax-deferred; top-slicing relief available. GWR check (s102 FA1986): settlor cannot retain benefit from the trust's investments. Settlor-interested trust: if settlor (or spouse) can benefit from trust income — income taxed on settlor. Periodic charges: max 6% effective rate; actual rate much lower in most cases. NRB (£325k s8C IHTA) reduces chargeable transfer at outset: CLT below NRB = no immediate IHT. BPR alternative: AIM shares (qualifying — s105 IHTA) held 2yr = 100% BPR relief without trust; £1m combined BPR/APR cap from April 2026 (Finance Act 2026). Specialist independent financial adviser and tax solicitor advice required before setting up any freezer trust arrangement.
Freezer Trusts for IHT: Complete Guide
What is a freezer trust and why 'freeze' an estate?
A 'freezer trust' is a colloquial term used in financial planning to describe structures that freeze the IHT-liable value of a person's estate at a fixed point, while allowing future asset growth to accumulate outside the estate. The idea is based on a simple observation: if you cannot or do not want to give assets away outright, you can at least stop the estate GROWING for IHT purposes by transferring the future appreciation into a trust. There is no statutory concept called a 'freezer trust' — the term refers to specific arrangements, most commonly: (1) Loan Trusts: the settlor lends money to a trust; the trust invests; the loan balance (in the estate) stays fixed while growth accrues in the trust. (2) Discounted Gift Trusts (DGTs): the settlor pays a lump sum in exchange for a series of regular payments; part of the sum is immediately discounted (removed from the estate); the rest is a PET or CLT. Both of these are commercially available products (typically insurance-bond-based) sold by life insurance companies and available through financial advisers. They are complex arrangements with multiple tax considerations — they should never be set up without specialist independent financial advice and, ideally, specialist tax advice as well.
Loan Trust — how the IHT freeze works in practice
A Loan Trust works as follows: the settlor lends money (e.g., £300,000) to the trustees of a trust at the outset. The loan is interest-free and repayable on demand. The trust invests the money (typically in an insurance bond or investment portfolio). At outset, there is no gift — the settlor has merely moved money from their bank account to a trust that owes them £300,000. The estate includes the loan receivable (£300,000) — unchanged. Over time, the trust investments grow. If the trust grows to £450,000 after 10 years: the estate still includes the loan receivable (£300,000 — unchanged, assuming no repayments); the growth (£150,000) is IN the trust and NOT in the estate. On the settlor's death: the outstanding loan is repayable to the estate (included as an asset); the trustees repay the loan; the growth (£150,000 in this example) remains in the trust for the beneficiaries, outside the estate. The IHT saving: the growth of £150,000 is entirely outside the estate. Without the loan trust, that £150,000 would have been in the estate at 40% = £60,000 of IHT on the growth. The earlier the loan trust is established, the more growth accrues outside the estate and the greater the IHT saving. The loan trust does not help with the initial £300,000 (still in estate) — it only helps with future growth. The settlor can draw down loan repayments (reducing the outstanding loan balance) at any time — providing access to capital — but each repayment reduces the capital available for future growth in the trust.
Discounted Gift Trust — the actuarial discount and how it works
A Discounted Gift Trust (DGT) is more aggressive than a loan trust: it actually removes part of the lump sum from the estate immediately, through an actuarial discount. Here is how it works: the settlor pays £200,000 into a trust and in return receives a series of regular payments for life (e.g., 5% per year = £10,000 per year). An actuary calculates the present value (PV) of those expected future payments based on standard mortality tables — this is the 'discount'. If the actuarial discount is £60,000 (based on the settlor's age and expected survival), then: (1) £60,000 is IMMEDIATELY outside the estate — the discount is not a gift; it represents what the settlor is retaining as the expected value of their income stream; (2) £140,000 (the balance) is a gift to the trust — either a PET (if the trust structure allows) or a CLT (if a discretionary trust). The PET/CLT (£140,000) may be below the NRB (£325k) — so no immediate IHT, but a 7-year clock runs. On death: the income stream ceases; the remaining trust fund passes to beneficiaries outside the estate; if the gift element (£140k) was a PET and the settlor died within 7 years: it is drawn back. The discount (£60k) is permanently outside the estate regardless. Key limitation: the income stream is fixed and irrevocable — the settlor CANNOT access capital above the regular payments. Anyone who might need flexible capital access should use a loan trust instead.
Relevant property regime charges on freezer trusts
Both loan trusts and discounted gift trusts are typically structured as discretionary trusts for the family. Discretionary trusts are subject to the relevant property regime (s58 IHTA 1984): periodic charges at 10-year anniversaries (s64 IHTA) and exit charges on distributions (s65 IHTA). For a Loan Trust: the periodic charge base is the trust's value ABOVE the outstanding loan amount (the loan reduces the chargeable value of the trust — it is a liability of the trust owed to the settlor/estate). So if the loan is £200k and the trust is worth £350k after 10 years: the periodic charge is calculated on £150k (the net value). If £150k is below the NRB: no periodic charge. For a Discounted Gift Trust: the periodic charge is based on the full trust fund value (no loan to deduct). If the trust has grown substantially above the NRB over 10 years, a periodic charge arises. Maximum periodic rate: 6% of the chargeable value (but the actual rate is typically much less than 6% because the effective rate is calculated by reference to the NRB and prior cumulation). Exit charges on distributions to beneficiaries: lower rate (n/40 of the periodic rate). The periodic and exit charges on these trusts are generally moderate if the trust value is managed to stay within or close to the NRB — a significant advantage of the loan trust (where the loan reduces the periodic charge base).
Who should consider a freezer trust — suitability and alternatives
A freezer trust is most suitable for people who: (1) Have a significant estate above the IHT threshold but cannot make outright gifts (they need some access to the capital); (2) Want to at least prevent estate growth for IHT purposes even if they cannot reduce it immediately; (3) Are in reasonable health and have a meaningful life expectancy (the longer the trust has to grow outside the estate, the greater the benefit); (4) Have a family who will ultimately benefit from the trust fund. Who should consider alternatives: (a) Outright gifts (PETs — s3A IHTA): if you can genuinely afford to give assets away and not need them back, outright PETs are simpler, more cost-effective, and have the same 7-year clock without the trust administration costs; (b) Normal expenditure from income (s21 IHTA): if you have surplus income, regular gifting from income is immediately exempt, uncapped, and requires no trust; (c) AIM shares / BPR: investing in BPR-qualifying assets (AIM shares, qualifying unlisted businesses) achieves 100% IHT relief after 2 years without any trust structure (subject to the April 2026 £1m cap); (d) Life insurance in trust: a level whole-of-life policy written in a simple life-of-another trust pays out outside the estate — the most cost-effective way to provide a lump sum to meet the IHT bill without necessarily reducing the estate. Freezer trusts are commercial financial planning products — they should always be reviewed by an independent financial adviser and compared against simpler alternatives before commitment.
Frequently Asked Questions
What is a freezer trust for inheritance tax?
A 'freezer trust' is a colloquial term for an IHT planning structure (typically a loan trust or discounted gift trust) that freezes the IHT value of assets in the settlor's estate at a fixed point, while allowing future growth on those assets to accumulate outside the estate. A loan trust: the settlor lends money to a trust; the loan balance stays in the estate (frozen); all growth above the loan accrues in the trust, outside the estate. A discounted gift trust: the settlor pays a lump sum and receives regular payments back for life; an actuarial discount is immediately outside the estate; the gift element (balance) is a PET or CLT with a 7-year clock. Neither removes the whole sum from the estate immediately — the loan trust only shelters future growth; the DGT only removes the actuarial discount immediately. Both are complex and require specialist financial and tax advice.
How does a loan trust reduce inheritance tax?
A loan trust reduces IHT by freezing the value of the loan in the estate while allowing all growth on the invested sum to accumulate outside the estate. Example: settlor lends £250,000 to a trust; trust invests and grows to £400,000 over 15 years. On death: estate includes the outstanding loan (£250,000 or any unrepaid balance); the growth (£150,000) is in the trust for beneficiaries — outside the estate. IHT saving: £150,000 × 40% = £60,000 compared to keeping the funds in the estate. The settlor retains access to capital through loan repayments (drawing down the loan on request). Each loan repayment reduces the outstanding loan balance in the estate — and if spent, also reduces the estate. The trust is typically discretionary — subject to 10-year periodic charges (s64 IHTA) and exit charges (s65 IHTA) on the GROWTH above the outstanding loan, not on the loan itself.
What is a discounted gift trust (DGT) for IHT?
A Discounted Gift Trust (DGT) is an insurance product where the settlor pays a lump sum into a trust and receives a series of regular payments for life in return. An actuary calculates the present value of those future payments (the 'discount') — this amount is IMMEDIATELY removed from the estate at the date of settlement, because it represents what the settlor retains (the value of their income stream). The balance (lump sum less discount) is a gift to the trust — either a PET (IHT-free after 7yr) or a CLT (subject to 20% immediate IHT if above NRB). Key benefit: the actuarial discount is immediately and permanently outside the estate — no 7-year clock. Key limitation: the income stream is fixed; the settlor cannot access capital above those fixed payments. Suitable for: those who want regular income AND want to reduce their estate. Not suitable for: those who may need flexible capital access. Requires specialist financial advice.
Are freezer trusts affected by periodic IHT charges?
Yes — if the trust is a discretionary trust (which most loan trusts and discounted gift trusts are), the relevant property regime applies (s58 IHTA 1984). Periodic charges arise at 10-year anniversaries (s64 IHTA): for a loan trust, the periodic charge is on the trust value ABOVE the outstanding loan (the loan reduces the chargeable base — it is a trust liability); for a discounted gift trust, the periodic charge is on the full trust fund. The periodic charge rate is calculated by reference to the NRB — if the trust value is below the NRB, the periodic charge is nil. Exit charges (s65 IHTA) arise on distributions to beneficiaries (a fraction of the periodic rate × the n/40 formula). In practice, if the trust fund stays close to or below the NRB, periodic and exit charges are minimal or nil. For larger trusts, specialist advice on managing the trust fund size to minimise periodic charges is worthwhile.
Is a freezer trust better than just making gifts?
For most people, outright gifts (PETs — s3A IHTA) to individuals are simpler and more cost-effective than a freezer trust — provided you can genuinely afford to give the assets away and do not need them back. A PET has the same 7-year clock as the CLT element of a discounted gift trust, with no trust setup costs, no annual trust administration, and no periodic charges. A freezer trust is better than a PET when: (1) you cannot afford to make outright gifts and need to retain access to the capital (loan trust repayments provide this access); (2) you want to freeze the estate value immediately (growth goes outside the estate from day 1 of a loan trust — a PET of the same sum only starts the 7-year clock from the date of the gift); (3) you are older and the risk of dying within 7 years makes outright PETs uncertain. Normal expenditure from income (s21 IHTA): if you have surplus income, this is always simpler and immediately exempt — no trust, no 7-year clock, no periodic charges. Seek independent financial advice before choosing between a freezer trust and outright gifting.
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