Quick answer
Yes, certain trusts may help reduce your inheritance tax liability in England and Wales, though they typically won’t eliminate it entirely. The effectiveness depends on the trust type: discretionary trusts and interest in possession trusts may defer or reduce IHT on assets above the nil-rate band of £325,000 (gov.uk — Inheritance Tax), while bare trusts generally offer no IHT advantage. Critically, gifts into most trusts are potentially exempt transfers—meaning they’re only fully exempt from IHT if you survive seven years after creation. From 6 April 2027, new rules will affect how trust assets are taxed. However, the effectiveness of any trust strategy depends on your specific circumstances, the assets involved, and your estate’s total value. This guide explains how different trust types interact with inheritance tax in 2026/27, the seven-year survivorship rule, and key planning strategies to consider.
Last reviewed: 24 May 2026 by the MP Estate Planning editorial team. Jurisdiction: England and Wales. Scotland and Northern Ireland have different probate and intestacy rules; the IHT thresholds are UK-wide.
Can a Trust Reduce Your Inheritance Tax?
Can a trust reduce your inheritance tax? In the UK, trusts are a powerful estate planning tool—but whether they can help you reduce your inheritance tax liability (IHT) depends on the type of trust, how it’s structured, and how it’s used. In this comprehensive guide, we explore how trusts interact with HMRC’s inheritance tax rules, which trusts can offer tax advantages, and how to use them effectively.
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What Is a Trust and Why Use One?
A trust is a legal arrangement where a person (the settlor) places assets under the control of trustees for the benefit of beneficiaries. While trusts are often used for asset protection and family planning, they also play a role in inheritance tax planning.
Common reasons people use trusts include:
- Protecting assets from care fees or divorce settlements
- Controlling how and when beneficiaries inherit
- Minimising inheritance tax liability
But the key question remains—can a trust reduce your inheritance tax? Let’s break it down.
How Inheritance Tax Works in the UK
Three rule changes you may need to consider (2026/27)
1. Pensions become subject to IHT from 6 April 2027. Most unused defined-contribution pension pots currently sit outside the estate for IHT — that ends on 6 April 2027 (gov.uk policy paper). HMRC estimates around 10,500 estates will face IHT for the first time as a result.
2. Business and agricultural property reliefs capped at £2.5m per person from 6 April 2026. Above the cap, only 50% relief applies — effective IHT of 20%. AIM shares dropped to 50% relief and do not use the £2.5m allowance (Saffery — APR/BPR reforms).
3. The NRB, RNRB and £2m taper threshold are frozen until 5 April 2031 following the 2024 and 2025 Budgets (gov.uk — NRB and RNRB freeze). With inflation, more estates will be pulled into IHT each year — a process commonly called “fiscal drag.”
Inheritance tax in the UK is charged at 40% on estates above the £325,000 nil-rate band. There’s also a £175,000 (gov.uk — RNRB) residence nil-rate band if you’re passing your main home to direct descendants. Any estate over these thresholds is subject to tax unless exemptions or reliefs apply.
This is where trusts come into play. Some trusts are treated differently for IHT purposes—but not all trusts significantly reduce inheritance tax.
Which Trusts Can Reduce Inheritance Tax?
1. Bare Trusts
A bare trust names the beneficiary outright and gives them access to the assets when they turn 18 (or 16 in Scotland). These are not effective for reducing IHT as the assets are treated as part of the beneficiary’s estate.
2. Discretionary Trusts
Discretionary trusts give trustees the power to decide how the assets are distributed among beneficiaries. Can a trust reduce your inheritance tax using this structure? Not entirely—but discretionary trusts do remove assets from the settlor’s estate if they live for seven years after the gift is made.
3. Interest in Possession Trusts
These allow a named beneficiary to benefit from the income of the trust during their lifetime. The capital may pass to another beneficiary later. These trusts are generally included in the beneficiary’s estate for IHT purposes, so they offer limited inheritance tax mitigation.
4. Trusts for Vulnerable Beneficiaries
Special rules apply to trusts for people with disabilities or learning difficulties. These may benefit from IHT exemptions and income tax advantages. For more on this, see the UK Government guidance.
When Can a Trust Reduce Inheritance Tax?
Can a trust reduce your inheritance tax? In specific cases, yes—and trusts can also help you mitigate or delay inheritance tax.
Gifts into Trust (and the 7-Year Rule)
When you place assets into a discretionary trust, it may be treated as a potentially exempt transfer (PET). If the settlor survives for seven years after making the gift, the assets are excluded from their estate for IHT purposes.
Nil Rate Band Trust Planning
Couples sometimes set up trusts that take advantage of the nil-rate band upon the first death, preserving that allowance and reducing the second estate’s tax bill.
Using Trusts for Life Insurance Policies
Placing a life insurance policy in trust can ensure the payout doesn’t form part of your taxable estate, helping to reduce IHT on that amount. This is one of the most effective ways a trust can help reduce your inheritance tax exposure.
Tax Rules You Must Understand
While trusts can reduce IHT, they come with tax responsibilities. Key taxes to understand include:
- Initial charge: 20% for transfers into some discretionary trusts above the nil-rate band
- Periodic charge: Up to 6% every 10 years on trust assets above the nil-rate band
- Exit charge: Charged when assets leave the trust
These taxes apply depending on the type of trust, the size of the trust, and when the transfer was made. It’s essential to get professional advice before setting up a trust.
How to Set Up a Trust That Minimises IHT
If you’re considering a trust to reduce your inheritance tax, you should follow these steps:
- Determine your goals—protection, tax planning, control, etc.
- Choose the correct type of trust for your needs
- Work with a qualified estate planner or solicitor
- Consider the 7-year rule and potential charges
- Ensure trustees understand their responsibilities
Setting up the wrong kind of trust or doing it without proper advice could result in unexpected tax bills or legal issues. Our team at MP Estate Planning is here to help you do it right.
Book a free consultation to see how a trust might fit into your inheritance tax planning.
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Conclusion: Can a Trust Reduce Your Inheritance Tax?
Can a trust reduce your inheritance tax? Yes—if used strategically and legally. While not all trusts significantly reduce IHT, certain types like discretionary trusts and trusts for life insurance policies can help reduce your tax bill. The key is setting up the right structure and understanding how HMRC treats different trusts.
Trust planning should never be a DIY task. One error can cost your family thousands. That’s why we’re here to help. Book your free consultation or view our fixed-fee pricing today.
Tax on Inherited Trust Assets: What Beneficiaries Need to Know
Inheritance tax often dominates the conversation around trust planning, but in our experience it is rarely the only tax that matters. Beneficiaries receiving distributions from a trust, or assets held within one, may face obligations under capital gains tax (CGT) and income tax rules as well. Understanding how these interact is an important part of any serious estate planning review.
Capital Gains Tax and Trust Distributions
When a trust disposes of an asset — or transfers it to a beneficiary — a CGT liability may arise on any gain made since the asset was acquired. Trustees generally benefit from an annual CGT exemption, though this is typically lower than the personal allowance available to individuals. As at 2024, trustees of most trusts are entitled to an annual exempt amount of £1,500, compared to £3,000 for individuals. Where a beneficiary receives an asset in specie rather than a cash sum, a disposal is generally still treated as occurring at market value, which may trigger a charge. HMRC’s guidance on trust CGT is set out in detail at gov.uk — Trusts and Capital Gains Tax. In some cases holdover relief may be available, deferring the gain until the beneficiary later disposes of the asset, but eligibility depends on the type of trust and the nature of the asset.
Income Tax on Trust Income Received by Beneficiaries
Income generated within a trust — from investments, rental property or other sources — is typically taxed at the trustee level before distributions are made. Discretionary trusts generally pay income tax at the trust rate, which currently stands at 45% on most income and 39.35% on dividends. When a beneficiary receives income from a discretionary trust they are entitled to a tax credit reflecting the tax already paid by the trustees, and may be able to reclaim some or all of this depending on their own marginal rate. Beneficiaries who are non-taxpayers or basic rate taxpayers may therefore receive a refund in certain circumstances. Interest in possession beneficiaries are generally taxed as if the income arose directly to them, which produces a different outcome. The rules are nuanced and we would always recommend taking advice from a regulated tax adviser before making assumptions about net returns.
Reporting Duties That Fall on Beneficiaries
Beneficiaries who receive distributions that carry an income tax credit are typically required to declare those payments via self-assessment. This is an area that is frequently overlooked, particularly where a beneficiary has not previously needed to file a tax return. HMRC’s Trust and Estates Manual at TSEM8000 sets out the treatment of beneficiary income in detail. Similarly, where a beneficiary receives an asset with a deferred CGT gain attached — for example following a holdover relief claim — they inherit an obligation to report and pay tax on the original gain when they eventually dispose of the asset. Understanding these downstream obligations is, in our view, just as important as understanding the IHT position at the point of settling the trust.
Common Questions About Trusts and Inheritance Tax
Can a trust bypass inheritance tax?
Not automatically, and any suggestion to the contrary should be treated with caution. A trust is a legal structure, not an exemption. Whether a trust reduces, defers or has no effect on an IHT liability depends entirely on the type of trust, what assets are placed into it, when the transfer is made, and whether the settlor survives the relevant period. Certain structures — such as a bare trust holding assets gifted more than seven years before death — may mean those assets sit outside the scope of IHT entirely, but this outcome is conditional, not guaranteed.
Can you avoid inheritance tax by putting money in a trust?
Placing money into a discretionary trust does not remove an IHT charge at the point of transfer if the value exceeds your available nil rate band, which is currently frozen at £325,000 until at least 2030. Amounts above that threshold may attract a 20% entry charge on transfer. Thereafter, a periodic charge of up to 6% applies every ten years, and an exit charge applies when assets leave the trust. In some scenarios — particularly where the trust holds a whole-of-life insurance policy written in trust — the structure can keep the proceeds outside the scope of IHT very effectively. The answer depends heavily on your individual circumstances.
What are the disadvantages of putting your house in a trust in the UK?
This is one of the most important questions in residential property planning and one that is frequently underexplored. If you transfer your main home into a discretionary trust but continue to live in it without paying a full market rent, HMRC is likely to treat this as a gift with reservation of benefit, meaning the property remains in your taxable estate for IHT purposes regardless. Beyond this, placing a property into certain trust structures can disqualify your estate from claiming the £175,000 residence nil rate band (RNRB), which is available only where a qualifying residential interest passes directly to direct descendants. Losing the RNRB — which on a couple’s combined estate is worth up to £350,000 of additional threshold — can significantly increase an IHT liability rather than reduce it. This is a risk that our team raises with every client considering property trust arrangements.
What are the 7 ways to avoid inheritance tax?
The most commonly referenced planning strategies in England and Wales include: making use of the £325,000 nil rate band and £175,000 RNRB; making outright gifts and surviving seven years (potentially exempt transfers); using annual gift exemptions and normal expenditure out of income; writing life insurance policies in trust; claiming business property relief or agricultural property relief on qualifying assets; making use of spousal or civil partner exemptions; and, where appropriate, settling assets into trust as part of a broader multi-tool strategy. No single approach is universally optimal. In our experience, the estates that achieve the most efficient outcomes typically combine two or three of these tools, tailored to the specific asset profile and family structure involved.
What is the best way to avoid taxes on an inheritance?
There is no single best approach, and we would be cautious of any adviser who suggests otherwise. From an IHT perspective, the most reliable strategy is early, structured planning that makes use of available exemptions and reliefs before they are needed. From a beneficiary’s perspective — managing CGT and income tax on inherited assets — taking advice at the point of receiving an inheritance, rather than after making decisions about what to do with it, typically produces better outcomes. Speaking with a regulated financial adviser and, where the estate involves property or business assets, a solicitor specialising in estate administration, is generally the appropriate starting point.