The question most people have after learning about securities-backed lending is a reasonable one: if billionaires borrow against their stock instead of selling it, they still have to pay the loan back eventually. So does that not just mean selling the stock later and paying the capital gains tax anyway?
The answer is no. And understanding why requires looking at the four ways these loans actually get managed, serviced, and resolved. The repayment mechanics are where the strategy becomes genuinely interesting, and where the tax logic runs much deeper than most people realise.
If you have not read our overview of how the broader borrowing strategy works, our guide to This article focuses specifically on what happens after the loan is taken out. What kind of loans are we talking about
The most common structure for borrowing against a stock portfolio is a Securities-Backed Line of Credit (SBLOC). With a securities-backed line of credit, major wealth managers will lend against the value of a stock portfolio using stocks, bonds, or mutual funds as collateral. The loan-to-value ratio is typically 50 to 70 percent of the portfolio value.
The wealthy use their portfolios as collateral to take out Lombard Loans or Securities-Backed Lines of Credit. Because a loan is not income but a liability that must be repaid, it is not taxable. A billionaire might borrow £1 million against a £100 million stock portfolio at an interest rate of 3 or 4 percent. If their portfolio grows by 7 or 8 percent annually, the growth of their wealth far outpaces the cost of the interest, making the debt effectively free.
For ultra-high-net-worth borrowers, private banks offer more favourable terms than retail brokerage margin loans. The collateral is substantial, diversified, and appreciating. The lender’s risk is low. The interest rates and credit terms reflect that.
These are not short-term loans in the conventional sense. They are structured as revolving credit facilities, lines of credit, or long-term arrangements that can run indefinitely, provided the underlying collateral maintains its value and the LTV ratio stays within the agreed limits.
How the loans actually get repaid: four routes
Route 1: Service the interest only, defer the principal indefinitely
The first and most common approach is not to repay the principal at all, at least not during the borrower’s lifetime. The strategy works as long as the portfolio keeps appreciating faster than the interest rate on the loan.
After five years, a portfolio kept fully invested while using a loan for liquidity can be worth significantly more than one where assets were sold to meet cash needs. Even with annual interest payments accumulating to more than two million dollars, the cost of borrowing is far lower than missing out on the appreciation of a fully intact investment portfolio. The strategy provides even more robust returns when rates are trending lower.
Dividends from the portfolio can also be used to service the interest without any additional selling. A large, diversified portfolio of dividend-paying stocks can generate enough regular income to cover the loan interest entirely, meaning the principal never needs to be touched. The loan simply runs forward while the portfolio continues to grow.
Route 2: Sell the minimum at carefully chosen moments
When the principal does need to be reduced, the approach is precision rather than volume. Rather than selling to access cash for spending (which is what the loan is for), the selling is done specifically to manage the loan balance, in minimum amounts, at maximum tax efficiency.
This might mean selling in a low-income year when the capital gains rate is lower. It might mean harvesting losses elsewhere in the portfolio to offset gains on the sale. It might mean waiting for a regulatory window when an executive is permitted to sell shares. The key distinction is that the decision to sell is driven by loan management rather than by liquidity need. The spending happens through the loan. The selling, when it occurs, is a deliberate tax planning exercise.
Route 3: Refinance with a new loan
As the portfolio grows in value, the borrower can take out a new, larger loan secured by the now more valuable portfolio and use the proceeds to pay off the old loan. SBLOCs and pledged-stock loans include continuous collateral monitoring. As the portfolio appreciates, the available credit line grows proportionally, allowing the borrower to access additional liquidity or refinance existing balances without selling.
This is the securities equivalent of a cash-out refinance in real estate. The asset has grown. The new loan reflects the new value. The old loan is retired with borrowed money rather than sold assets. No capital gains event occurs. For more on how the same logic applies specifically to property, our guide to covers that side of the strategy in detail. Route 4: Hold until death
The most powerful repayment mechanism in the strategy is not really a repayment mechanism at all. The final step occurs upon the individual’s death. Under current tax laws, when assets are passed on to heirs, they receive a step-up in basis. The value of the inherited assets is reset to their market value at the time of the original owner’s death. Any capital gains accrued during the original owner’s lifetime are effectively erased, allowing heirs to sell the assets with minimal or no capital gains tax liability.
This strategy results in appreciation escaping tax entirely. The heirs can sell the stock immediately to repay the outstanding loans, paying tax only on any gains that occurred after the date of death, not on the decades of appreciation that accumulated during the original owner’s lifetime.
The loan is repaid. The stock is sold. But the capital gains that built up over a career of holding are wiped out entirely at the point of inheritance. This is the “die” in buy, borrow, die, and it is why the strategy is designed to run across a lifetime rather than a single transaction.
The risk that changes everything: margin calls
None of the four routes above work if the underlying portfolio falls far enough in value to trigger a margin call.
If pledged securities fall in value and the equity cushion is reduced, lenders issue collateral notices or require remedial action. Maintenance thresholds define the collateral value below which action is required. Borrowers may have short windows to post cash, transfer eligible assets, or repay part of the loan. If they cannot, lenders can sell the pledged shares, apply cash collateral, or accelerate the loan.
This is the structural risk of the entire strategy. A significant and rapid market decline, particularly in a concentrated position in a single stock, can force a sale at the worst possible moment: when prices are low and the tax bill is unavoidable. The strategy works most reliably when the portfolio is large, diversified, and held at a conservative LTV ratio that provides enough buffer to absorb market volatility without triggering remedial action.
For this reason, the ultra-wealthy typically borrow at well below the maximum available LTV. Having room is the safety margin that keeps the strategy intact when markets move against them.
A note on jurisdiction
The mechanics described here, particularly the step-up in basis at death, primarily reflect the US tax framework. Current law treats loan proceeds as nontaxable, as they represent a temporary transfer of cash that will be repaid, not income per se. But the ability to execute this strategy depends heavily on estate planning rules that allow heirs to receive a step-up in cost basis.
Germany and Ireland operate under materially different rules. German inheritance tax, the treatment of unrealised gains at death, and the interaction with exit tax for shareholders all differ significantly from the US framework. If you hold a substantial stock portfolio or company shares and are resident in Germany or Ireland, the specific tax treatment of borrowing against those assets and what happens to the embedded gain at death needs to be reviewed in the context of your jurisdiction.
Frequently asked questions
Do billionaires ever actually repay the principal on these loans?
Sometimes, but often not during their lifetime. The strategy is designed so that the loan can be managed through interest payments, refinancing, or portfolio income without ever requiring a principal repayment that triggers a capital gains event.
What happens if the stock price crashes?
A significant fall in the value of the pledged portfolio can trigger a margin call, requiring the borrower to post additional collateral, repay part of the loan, or face forced selling by the lender. This is the principal risk of the strategy and why borrowing well below the maximum LTV ratio matters.
Is the interest on these loans tax deductible?
In some jurisdictions and for some loan structures, interest on investment loans is deductible against investment income. The specific treatment depends on the jurisdiction, the loan structure, and what the proceeds are used for. Always take advice from a qualified professional.
What is the difference between an SBLOC and a margin loan?
A margin loan is a standard brokerage product used primarily for short-term trading. A Securities-Backed Line of Credit (SBLOC) offered by private banks and wealth managers is a more flexible arrangement designed for longer-term liquidity needs, typically with more favourable rates for high-net-worth borrowers.
Does the step-up in basis at death apply in Germany and Ireland?
No. The step-up in basis described in this article is a feature of the US tax framework. Germany and Ireland have different rules governing the tax treatment of inherited assets, unrealised gains at death, and estate planning. The underlying borrowing mechanics are relevant globally, but the estate planning payoff of the strategy is jurisdiction-specific.
The bottom line
The question of how billionaires pay back loans against stock assumes that repayment is the goal. For most of the ultra-wealthy using this strategy, repayment is the last resort, not the plan. The plan is to service the interest using portfolio income, roll the principal forward through refinancing as the portfolio grows, and ultimately resolve the loan through a step-up in basis at death.
The strategy is legal, well-documented, and entirely dependent on the portfolio appreciating faster than the cost of borrowing. When that condition holds, the loan does not need to be repaid in the conventional sense. It just needs to be managed.
Your first consultation with Richmond Blackwood is free. If you hold a significant investment portfolio or company shares and want to understand how borrowing against assets works in the context of German or Irish tax rules, get in touch.
Disclaimer
This article is for general informational purposes only and does not constitute tax, legal, or financial advice. The mechanics described primarily reflect the US tax framework. Treatment of securities-backed lending, inheritance, and capital gains at death differs materially in Germany, Ireland, and other jurisdictions. Always take advice from a qualified professional before making structuring or financing decisions.
