Gift/Loan Arrangement (or Equity Stripping)

What Is a Gift/Loan Arrangement?

A gift/loan arrangement is something that you can put in place if you own your principal place of residence (or another property in your own name) and you also have a family discretionary trust, and as part of your estate planning you need to have the net value of the property to be as low as possible. That is, for reasons of your estate planning you want the value of the property, less the amounts owing under any mortgages on it, to be a relatively small amount.

What Are the Components of a Gift/Loan Arrangement?

  • You must have real estate (which could be your principal place of residence).

  • You must have a family discretionary trust governed by a trust deed which permits you to gift money into the trust and which also permits the trust to make loans to you.

  • You must have available cash which you can transfer to your trust as a gift (done pursuant to an appropriate document which your lawyer will prepare).

  • On receiving the cash gift your trust then lends the cash to you pursuant to an appropriate deed of loan, and in order to secure the repayment of that loan your trust will take a mortgage over your property.

  • The net value of your property will now be its current market value less the amount necessary to repay the loan. The equity in the property (that is the difference between its current market value and the amount owed under the loan) has now been transferred from you into your trust.

 Why Would I Want a Gift/Loan Arrangement?

There can be circumstances where your estate planning intentions will go wrong if you hold a lot of equity in your family home (or other real estate you own). You might think that the problem could be fixed by simply transferring the property into the family trust, however if you did such a transfer then you will have to pay the full rate of stamp duty, the property will suddenly become liable for land tax (and to make matters worse the land tax free threshold will not apply) and if the property is your principal place of residence then it will have lost the principal place of residence exemption from capital gains tax. Therefore instead of transferring the property to the trust the better option could be to transfer the equity from yourself to your trust using a gift/loan arrangement.

The circumstances where this arrangement could work might be quite rare, but an example could be as follows: –

A husband-and-wife owned their principal place of residence outright, they had money in the bank and other assets, and they had an existing family discretionary trust. They had a son and a daughter.

They had made substantial gifts to the son. In order to ultimately treat their son and daughter equally they both made wills that provided that when the second of them died the daughter would get a greater share of their estate to compensate for the substantial gifts they had made to the son during their lifetime. The son was furious because he believed that the gifts he had received were justified without equalisation to the daughter. Over a long period of time the son was adamant that when his parents died he would sue their estate for a greater provision in his favour.

The mother had lost capacity through dementia so she couldn’t make a new will. The father had her power of attorney. 

In order to minimise the chances of the son succeeding in “double dipping” the parents made a gift of their own money to their family discretionary trust (documented by a deed of gift). The trust then lent the money back to the parents (documented by a deed of loan) and secured by a mortgage over their house. They also arranged things to ensure that the daughter took over control of the trust when they died.

The effect is that on the death of the survivor of the husband and wife the trust would call in the loan which would have to be paid by their estate into the trust for the daughter to take, leaving their estate too small for it to be worth suing. It is important to note that in this case the circumstances were such that the concept of “notional estates” could not be applied to the trust.