Using trusts to manage inheritance tax can help you keep more of your estate for your beneficiaries, but it’s important to understand what really works and what doesn’t in 2025. Trusts do not automatically mean your assets are free from inheritance tax, but they can offer ways to reduce the overall tax bill when set up and managed correctly. Knowing the rules around trusts and tax charges is key to making the right decisions.
You need to be aware that trusts come with different tax charges, like entry, exit, and ten-year charges, which can affect how much tax is due. How you use the trust and who you choose as trustees will also impact its effectiveness in managing inheritance tax. Getting professional advice is often necessary to make trusts work in your favour.
Many people believe trusts can completely avoid inheritance tax, but the reality is more complex. This article will guide you through what works, what doesn’t, and the main points to focus on if you want to use trusts to plan your inheritance tax for 2025.
Trusts let you control how your assets are handled after you die. They can affect how much inheritance tax (IHT) is owed and who benefits. Knowing how trusts work, how trustees and beneficiaries fit in, and recent tax rules will help you make better decisions for your estate planning.
A trust is a legal arrangement where you (the settlor) transfer assets to a trustee. The trustee manages these assets for the beneficiaries you name. You can set rules on how and when the beneficiaries receive the assets.
Trustees have a legal duty to follow your instructions and manage the trust properly. They must keep records, handle investments, and report to HMRC if needed.
Beneficiaries are the people or organisations who receive benefits from the trust. They don’t own the assets until the trust says so. Trusts give you control beyond your lifetime, which can help with inheritance tax planning trusts.
Trust assets may be subject to inheritance tax charges during your lifetime and after your death. Normally, trusts pay IHT every ten years (the "ten-year charge") and also when assets leave the trust (exit charges).
There are different IHT rules depending on the trust type:
Trusts can protect your estate from larger IHT bills if set up correctly. However, trusts themselves have specific thresholds and rates you must follow to avoid unexpected tax charges.
From April 2025, IHT rules for trusts have new changes. The nil-rate band remains £325,000, with a residence nil-rate band of up to £175,000 for passing a home to direct descendants.
New rules affect how overseas assets in trusts are taxed. Whether a settlor is considered UK-domiciled or long-term resident now determines how non-UK assets are charged.
Starting April 2026, each existing trust will have its own £1 million allowance for inheritance tax. This small change means more detailed record keeping and planning is necessary.
Trusts can help manage your inheritance tax, but different types work in different ways. Some trusts give you control over who benefits and when, while others have more straightforward ownership rules. The tax treatment varies depending on the trust you choose and your specific circumstances.
Discretionary trusts give trustees the power to decide who receives income or capital and when. This flexibility means beneficiaries do not have a fixed right to assets, which can help limit inheritance tax (IHT) charges.
However, discretionary trusts are taxed more heavily in certain ways. The trust itself pays IHT charges every 10 years, known as “ten-year charges,” which can be up to 6% on the value above the nil-rate band. When assets are passed out to beneficiaries, there may also be exit charges.
You can use discretionary trusts to protect family wealth and provide for multiple people without automatically triggering large IHT bills on death. But be aware they carry ongoing tax costs and complex rules.
With a bare trust, the beneficiary has an immediate and absolute right to the assets. This means once the trust is set up, the assets are treated as belonging directly to the beneficiary.
For inheritance tax, this means the trust assets are usually part of the beneficiary’s estate, not yours. You cannot reduce IHT by placing assets into a bare trust for an adult because you lose control, and it doesn’t remove the value from your estate.
Bare trusts are often used for children or young adults, as the assets automatically belong to the beneficiary once they reach 18 (in England and Wales). Because of this simple structure, they have no special IHT advantages but are easy to understand and administer.
An interest in possession trust gives a beneficiary the right to receive income from the trust assets during their lifetime. The capital usually passes to other beneficiaries after their death.
For IHT, the value of the assets in the trust is usually treated as part of the life tenant’s estate. This means if you set up an interest in possession trust and keep the right to income, the assets can still be liable for IHT on your death.
This type of trust offers some control over income but limited inheritance tax benefits. It suits situations where you want to provide income for someone for life, then pass capital elsewhere. The tax rules can be complex, so it’s important to plan carefully.
Loan trusts involve you lending money to a trust while retaining ownership of the money loaned. The loan amount is usually returned to you or your estate, so only the growth of the trust assets falls outside your estate for IHT.
This means you can gift the growth potential while retaining access to your capital, which reduces IHT exposure. However, you must repay the loan on demand, or it passes back to your estate.
Discounted gift trusts work on a similar idea but allow you to keep a guaranteed income for life, with the gift partially “discounted” for IHT because of this retained right.
Both types require careful setup to work correctly and are useful if you need income but want to reduce your future tax bill. They are often considered advanced tools in trust planning and need professional advice.
For more details, see information on trusts and inheritance tax.
You can use several specific tax rules and reliefs to reduce the amount of inheritance tax (IHT) payable on your estate. Planning carefully around allowances, gifts, and certain types of assets helps protect more of your wealth for your beneficiaries.
The nil-rate band (NRB) lets you pass on up to £325,000 tax-free. This is your basic IHT allowance. If your estate is below this, no IHT is due on that portion.
You can also use the residence nil-rate band (RNRB) if you leave your home to direct descendants. As of 2025, this adds up to £175,000 more tax-free allowance, meaning you could pass on up to £500,000 without IHT.
Both bands can combine, but only if you meet certain conditions. Make sure your estate planning takes full advantage of these allowances to reduce IHT.
You can reduce IHT by gifting assets during your lifetime. Gifts made more than seven years before your death usually fall outside your estate for tax purposes.
If you gift within seven years, the tax rate reduces on a sliding scale, with no tax after seven years. This is called taper relief.
There are also annual exemptions (£3,000 per year) and other small gift allowances. Using gifts wisely can lower the taxable value of your estate and protect assets from IHT.
Business Property Relief (BPR) lets you pass qualifying business assets or shares with up to 100% IHT relief. To qualify, the business must meet specific conditions and you need to have held the assets for at least two years.
Setting up charitable trusts is another way to reduce IHT. Assets left to charity receive 100% relief from IHT, and if you leave at least 10% of your estate to charity, the tax rate on the rest can reduce from 40% to 36%.
Both options are valuable for cutting your inheritance tax bill while supporting business or charitable causes. For detailed rules, consider professional advice on these reliefs.
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Using trusts to manage inheritance tax often seems straightforward, but there are important restrictions and costs you must understand. Trusts can trigger ongoing tax charges and create complexities that reduce their effectiveness. You also need to consider the tax impact on beneficiaries, which can be significant.
When you place assets in a trust, be aware of the ten-year charge. This tax applies every 10 years on the net value of the trust's relevant property above the nil-rate band. The rate can be up to 6%. This means the estate could face repeated taxation while assets remain in the trust.
There are also exit charges when assets leave the trust. These are calculated based on the time elapsed since the last ten-year charge or the trust's start. Exit charges can reduce the value passed to your beneficiaries and should be factored into any planning.
Because trusts are not exempt from these charges, you may not avoid inheritance tax entirely. The entry charge also applies when you first place assets into some types of trusts, which can be 20% on amounts above the threshold.
Complex trusts, like mixed trusts or those with multiple classes of beneficiaries, often create unintended complications. These structures can increase paperwork and administrative costs, making it harder to keep track of tax liabilities and compliance.
You might also lose tax reliefs, such as the residence nil-rate band, when transferring a family home into certain trusts. This limits the overall tax efficiency of these arrangements.
The probate process can be delayed or complicated if trusts are not set up clearly. Legal advice is essential, but even then, misunderstanding rules around transition serial interest and mixed trusts can lead to mistakes that raise your tax bill.
Even if you reduce inheritance tax on your estate, beneficiaries may face tax bills when receiving assets from a trust.
Exit charges apply when beneficiaries withdraw assets, reducing how much they actually receive. They could also inherit tax liabilities if trusts generate income or gains.
You should understand that trustees are responsible for reporting and paying certain taxes, but beneficiaries may still see delays or reductions in payments. Planning must include how tax charges will affect those who receive benefits to avoid surprises.
Ignoring these points can mean the tax relief you hoped for does not fully reach the people you intended to help.
For more detailed information on these tax rules and how trusts work, see trusts and inheritance tax guidance on Which?.
Using trusts effectively means understanding how tax rules affect your assets and ensuring you follow legal requirements to avoid problems. By getting professional advice, you can make the right choices to protect your wealth and reduce taxes.
When you set up a trust, you need to consider how income tax and capital gains tax (CGT) apply. Trusts often pay income tax at higher rates than individuals, so managing tax efficiency is key. Income generated by trust assets can be taxed at rates up to 45%, with some trusts paying 38.1% on dividends.
Capital gains tax also applies when trust assets are sold or transferred. Trusts have a lower annual exempt amount (£6,000 for 2025/26) compared to individuals, which means gains beyond this are taxed. The rate depends on the asset type, typically 20% for most gains but 28% for residential property.
Careful planning can help reduce tax bills, such as using the personal allowance of beneficiaries or timing asset disposals. Knowing how income and capital gains tax work lets you structure the trust in line with your financial goals.
HM Revenue & Customs (HMRC) closely monitors trusts to make sure tax rules are followed. You must report trust income and gains with a tax return. This includes paying charges like the 10-year periodic charge and exit charges on certain trusts, which can affect inheritance tax.
Failing to comply can lead to penalties or extra tax bills. Keeping detailed records and submitting accurate tax returns on time is essential. HMRC expects trustees to understand tax rules and keep abreast of changes.
Regular reviews of the trust’s tax position reduce the risk of errors. Staying compliant protects the trust’s value and avoids legal or financial trouble later on.
Good legal advice is crucial when setting up or managing a trust. A solicitor can help you choose the right type of trust that fits your objectives and ensures clarity in the trust deed to avoid disputes.
Financial advisers guide you on how to achieve tax advantages while balancing risk and control. They help optimise trustees’ decisions on investments and distributions to improve tax efficiency.
Working closely with both legal and financial experts keeps your approach aligned with current laws and tax rules. This teamwork can save you money and protect your assets from unexpected costs or challenges.
When managing inheritance tax through trusts, you must pay special attention to vulnerable beneficiaries and minors. Different rules and protections apply, especially around tax treatment and asset control. Your choices here directly affect how funds are safeguarded and accessed.
If your beneficiary is vulnerable—due to disability or age—or a bereaved minor, special trusts can protect their interests while offering tax advantages. For example, trusts established for vulnerable people are often exempt from the usual 10-year inheritance tax charges.
A vulnerable person trust is designed to benefit those who cannot manage finances themselves, such as disabled adults or children under 18 with a deceased parent. A bereaved minor trust specifically refers to a child under 18 who has lost a parent. Both types allow the funds to be managed by trustees without risking the beneficiary’s eligibility for means-tested benefits.
These trusts are set up through a detailed trust deed that outlines how trustees must manage the assets. Using such trusts can reduce your inheritance tax bill while ensuring your vulnerable or minor beneficiaries are provided for correctly.
Life insurance policies can be an effective tool to cover potential inheritance tax liabilities. You can place your policy into a trust to keep the payout out of your estate, meaning it is treated as excluded property.
By holding the policy in trust, the payout can be directed to your beneficiaries quickly, without going through probate. This is particularly useful when you want to support minors or vulnerable individuals and need funds to be available immediately upon death.
However, the terms of the trust deed must specify how and when payments are distributed. Using a life insurance trust can help reduce your inheritance tax bill by removing the policy's value from your estate, so it doesn't increase the tax threshold burden.
How assets are distributed after your death depends heavily on the type of trust you set up. For vulnerable and minor beneficiaries, trustees control when and how funds are released, rather than handing over lump sums immediately.
For example, life interest trusts allow a beneficiary to receive income from the trust assets for life, but the capital passes to others—often safeguarding the inheritance from being spent too quickly or lost. For minors, trustees can accumulate income or capital until the child reaches 18 or an age specified in the trust deed.
These controls help protect the inheritance while reducing the risk of losing means-tested benefits. The trust's structure also impacts your inheritance tax threshold and may lessen your inheritance tax bill due to the special rules for vulnerable or bereaved minor trusts.
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