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Dear Shareholder:

This annual report for Franklin Limited Duration Income Trust covers the fiscal year ended December 31, 2018.

Your Fund’s Goal and Main Investments

The Fund seeks to provide high, current income, with a secondary objective of capital appreciation to the extent possible and consistent with the Fund’s primary objective, through a portfolio consisting primarily of high-yield corporate bonds, floating rate corporate loans and mortgage- and other asset-backed securities.

Performance Overview

For the 12 months under review, the Fund posted cumulative total returns of -9.07% based on net asset value and -14.86% based on market price, due in part to the rights offering that the Fund completed during the period. Net asset value decreased from $12.32 per share on December 31, 2017, to $10.11 at period-end, and the market price decreased from $11.83 to $9.02 over the same period. You can find the Fund’s long-term performance data in the Performance Summary on page 6.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown.

Economic and Market Overview

The 12-month period under review brought increased volatility for both financial markets and interest rates, as a variety of investor concerns were juxtaposed against the momentum of the continued global economic expansion. 2018 started off in a volatile manner, as volatility returned to financial markets in the first quarter, due to fears of higher interest rates and escalating trade tensions. Despite these headwinds, economic growth and corporate earnings continued to expand, particularly in the U.S., where tax reform signed into law at the end of 2017 began to show benefits for both corporate profitability and liquidity.

The trend carried forward into the second quarter, as U.S. economic data more than offset lingering trade war concerns and pockets of weakness in certain emerging market

*Total investments include long-term and short-term investments and exclude the principal amount of the Credit Facility and other financial leverage.

**Includes collateralized loan obligations.

***Rounds to less than 0.1% of total investments.

economies. Aided by solid economic growth and lower tax rates, U.S. corporations continued to see increases in earnings. The number of Americans filing for new unemployment benefits touched a half-century low in mid-September, and labor shortages were observed across many occupations and skill sets. Hiring regained momentum and the unemployment rate dropped below 4.0%, reaching its lowest level in nearly five decades. Against the backdrop of inflation concerns combined with strong economic growth and a robust job market, the U.S. Federal Reserve (Fed) raised short-term interest rates four times during the year, bringing the benchmark federal funds target rate to a range of 2.25%–2.50%. In what proved to be a volatile year for interest rates, yields generally rose across the Treasury curve, with the most notable changes coming from the short end, especially as the curve flattened toward period-end.

As 2018 came to a close, renewed global growth worries, simmering trade tensions and slumping commodity prices overwhelmed financial markets, leaving few areas immune to the sell-off. The Fed’s move away from accommodative monetary policies created uncertainty over how aggressive it might be in hiking interest rates going forward, representing a tipping point for investors as little progress in U.S.-China trade talks muddied the market outlook. By December, concerns about a U.S. government shutdown amid partisan political rancor, as well as growing disarray surrounding plans for the U.K. to exit the European Union, reinforced a risk-off mood.

Over the full 12-month period, the broader stock market, as measured by the Standard & Poor’s 500^® Index (S&P 500^®), had a -4.38% total return.¹ Fixed income markets posted mixed returns, with less interest-rate sensitive and lower-quality asset classes generally outperforming higher-quality and more interest-rate sensitive asset classes for much of the year before reversing sharply in the fourth quarter. Benefiting from strong rallies in the risk-off fourth quarter, U.S. Treasuries and mortgage-backed securities (MBS) posted total returns of +0.86% and +0.99% for the 12-month period, respectively, as measured by the Bloomberg Barclays U.S. Treasury Index and the Bloomberg Barclays U.S. Securities MBS Fixed Rate Index.¹ Meanwhile, the Credit Suisse (CS) Leveraged Loan Index (LLI) posted a +1.14% total return and the CS High Yield Index had a -2.37% total return.²

During the period, we increased our exposure to leveraged loans, while reducing our exposure to high-yield corporate bonds and asset-backed securities. In October, we also completed a successful rights offering on behalf of the Fund, raising $64.3 million in proceeds (net of expenses) to be deployed in an opportunistic manner across multiple market segments, including marketplace loans.

Investment Strategy

We invest in a diversified mix of fixed income securities, primarily high-yield corporate bonds, senior secured floating rate corporate loans, and mortgage- and other asset-backed securities. Our top-down analysis of macroeconomic trends

*The distribution amount is the sum of all distributions to shareholders for the period shown and includes net investment income and tax return of capital. All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends.

combined with a bottom-up analysis of market sectors, industries and issuers drives our investment process. We seek to maintain a limited duration, or interest-rate sensitivity, to moderate the impact that fluctuating interest rates might have on the Fund’s fixed income portfolio. Within the corporate bond and corporate loan sectors, we seek securities trading at reasonable valuations from issuers with characteristics such as strong market positions, stable cash flows, reasonable capital structures, supportive asset values, strong sponsorship and improving credit fundamentals. In the mortgage- and other asset-backed securities sector, we look to capture an attractive income stream and total return through our analysis of security prepayment assumptions, potential pricing inefficiencies and underlying collateral characteristics.

Manager’s Discussion

High-Yield Corporate Bonds

High-yield corporate bonds had a -2.37% total return for the 12 months ended December 31, 2018, as measured by the CS High Yield Index.² The yield spread of the CS High Yield Index above comparable U.S. Treasuries widened from 394 basis points (bps) to 575 bps over the course of 2018, a year that can be broken up into two parts when analyzing results. Benefiting from a supportive fundamental and technical backdrop, high-yield corporate bonds fared well for much of 2018, as the CS High Yield Index posted a +2.52% total return for the year-to-date through September.² However, in the last three months of the year, positive economic trends gave way to headwinds stemming from rising interest rates, U.S.-China trade tensions and general concerns regarding the economic cycle, leading to a fourth quarter total return of -4.77% for the index as the yield spread widened by more than 200 bps.² Despite the spread widening that took place in the fourth quarter, high-yield corporate bonds still performed better than select fixed income asset classes for the full year. High-yield corporate bonds also provided downside protection relative to equities in the fourth quarter, performing better than the S&P 500’s -4.38% total return in 2018.¹

Within high-yield corporate bonds, returns were led by lower-tier credits for much of 2018, as BB-rated bonds underperformed B-rated bonds, which in turn underperformed CCC-rated bonds through September. The end of 2018 brought about a reversal in this trend as well, as fourth quarter declines caused CCC-rated bonds to underperform their B-rated and BB-rated counterparts for the full calendar year. Performance also varied across industries, with retail, health care and telecommunication services leading contributors, while manufacturing and energy represented meaningful detractors. Another notable theme for 2018 was the dramatic reduction in new-issue supply, which helped to offset meaningful outflows for high-yield corporate bonds amid weak retail demand.

Floating Rate Corporate Loans

For the 12-month period under review, the floating rate corporate loan asset class posted a +1.14% total return, as measured by the CS LLI.² For much of 2018, the loan market benefited from strong technical conditions as issuance of collateralized-loan obligations (CLOs) and retail investors drove demand for floating rate assets. However, technical conditions significantly shifted toward the end of the year as broader market volatility spilled over into the loan market.

Amid weakened demand, loan prices declined to the lowest levels in more than two years.

Issuance related to mergers and acquisitions increased, in contrast to the prior year when a majority of primary activity was repricing and refinancing deals. Despite the increase in new supply, strong demand from record CLO volume provided strong demand for loans and kept loan technical conditions balanced for much of the year. While flows into loan mutual funds also provided steady demand for most of the year, outflows accelerated later in the period, with record monthly outflows in December. Many retail investors in the market reacted to volatility across equity and credit markets, in addition to uncertainty of future rate hikes that would increase loan coupons.

Despite price declines in the loan market, the default rate by principal amount declined during 2018 and ended below the historical average, after reaching a three-year high earlier in the year. Although technical conditions had weakened later in the year, fundamental conditions remained generally supportive despite higher leverage levels, especially among first-lien loans.

MBS and Securitized Sectors

Securitized sectors provided positive results during the period. Non-agency residential MBS (RMBS), agency MBS and commercial MBS (CMBS) all produced positive total returns and outperformed high-yield corporate bonds. Of the securitized sectors in which the portfolio invests, only RMBS beat the strong performance of senior-secured floating rate loans.

MBS fundamentals remain supportive and the prepayment outlook continues to look fairly benign, in our view. The extended period of low mortgage rates led to a compressed coupon stack within the mortgage universe. In the current environment, many qualified homeowners have already refinanced, and with rising mortgage rates there is less economic incentive to refinance, leaving less than 10% of the existing universe refinanceable. With this as a fundamental backdrop, technical factors, such as day count, have a more meaningful impact on prepayment speed increases or decreases on a monthly basis. We expect prepayments to remain contained, given the low incentive to refinance loans, increasing mortgage rates and slowing seasonal home purchases.

As part of the balance sheet normalization plan, the Fed would continue to maintain a $20 billion cap on runoff during 2019’s

first quarter. Considering the current composition of the Fed’s portfolio, the runoff on the portfolio should be less than $20 billion a month, leading to investments of $300 million a month for operational readiness purposes. We expect MBS spreads to widen during 2019’s first quarter, due to technical reasons, driven by an increase in supply due to the reduced purchases from the Fed’s balance sheet normalization plan during the quarter.

Thank you for your continued participation in Franklin Limited Duration Income Trust. We look forward to serving your future investment needs.

Sincerely,

		Roger A. Bayston, CFA Lead Portfolio Manager
		Sonal Desai, Ph.D.
		Glenn I. Voyles, CFA

In agency MBS, the portfolio’s mortgage exposure had the heaviest allocation in conventional Freddie Mac (Federal Home Loan Mortgage Corporation) and Fannie Mae (Federal National Mortgage Association) MBS, primarily in 4.0% and 3.5% coupon securities. We remained allocated to RMBS, where fundamental and technical forces remain positive, and in CMBS securities we view as fundamentally sound bonds at attractive valuations.

		Madeline Lam
		Justin Ma, CFA

Portfolio Management Team

The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2018, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

Managed Distribution Plan

The Fund adopted a managed distribution plan (the “Plan”) under which the Fund makes monthly distributions to common shareholders at an annual minimum fixed rate of 10% based on average monthly net asset value (“NAV”) of the Fund’s common shares. The primary purpose of the Plan is to provide the Fund’s shareholders with a constant, but not guaranteed, fixed minimum rate of distribution each month. The plan is intended to narrow the discount between the market price and the NAV of the Fund’s common shares, but there is no assurance that the plan will be successful in doing so.

Under Plan, to the extent that sufficient investment income is not available on a monthly basis, the Fund will distribute long-term capital gains and/or return of capital in order to maintain its managed distribution level. No conclusions should be drawn about the Fund’s investment performance from the amount of the Fund’s distributions or from the terms of the Plan. The Board may amend the terms of the Plan or terminate the Plan at any time without prior notice to the Fund’s shareholders. The amendment or termination of the Plan could have an adverse effect on the market price of the Fund’s common shares. The Plan is subject to periodic review by the Board, including a yearly review of the annual minimum fixed rate to determine if an adjustment should be made.

The Fund calculates the average NAV from the previous month based on the number of business days in that month on which the NAV is calculated. The distribution is calculated as 10% of the previous month’s average NAV, divided by 12. Typically, distributions will be declared by press release 10 days before the last business day of each month, with the record date on the last business day of the month. The payment date for the distribution will typically be during the middle of the next month.

With each distribution that does not consist solely of net investment income, the Fund will issue a notice to shareholders and an accompanying press release that will provide detailed information regarding the amount and composition of the distribution and other related information. The amounts and sources of distributions reported in the notice to shareholders are only estimates and are not being provided for tax reporting purposes. The actual amounts and sources of the amounts for tax reporting purposes will depend upon the Fund’s investment

experience during its full fiscal year and may be subject to changes based on tax regulations. The Fund will send shareholders a Form 1099-DIV for the calendar year that will tell them how to report these distributions for federal income tax purposes.

The Fund may at times distribute more than its net investment income and net realized capital gains; therefore, a portion of the distribution may result in a return of capital. A return of capital occurs when some or all of the money that shareholders invested in the Fund is paid back to them. A return of capital does not necessarily reflect the Fund’s investment performance and should not be confused with ‘yield’ or ‘income’. Any such returns of capital will decrease the Fund’s total assets and, therefore, could have the effect of increasing the Fund’s expense ratio. In addition, in order to make the level of distributions called for under its plan, the Fund may have to sell portfolio securities at a less than opportune time.