Trust for Inheritance Tax: A Smart Way to Protect Your Estate

Setting up a trust for inheritance tax is one of the most effective strategies for preserving wealth and protecting your loved ones from unnecessary tax burdens. In the UK, inheritance tax (IHT) can claim up to 40% of your estate above the tax-free threshold. But with careful planning, including the use of trusts, you can minimise or even avoid this liability.

This guide explains how a trust for inheritance tax works, the different types of trusts available, and how to make them part of your broader estate plan. If you’re ready to secure your assets, book a free consultation or check out our pricing page.

What Is a Trust for Inheritance Tax?

A trust is a legal arrangement where you (the settlor) transfer assets to trustees, who manage them for the benefit of one or more beneficiaries. A trust for inheritance tax is used specifically to reduce the value of your taxable estate, either by moving assets out of your name or by controlling how and when they are distributed.

By removing these assets from your estate, you can legally reduce your IHT bill—sometimes to zero—while maintaining control over how your wealth is managed and passed on.

Why Use a Trust for Inheritance Tax?

• Reduces the value of your estate for IHT purposes
• Helps protect assets from creditors or divorce settlements
• Gives you control over when and how beneficiaries receive assets
• Allows for tax-efficient planning across generations

For more insights into IHT planning, visit our Inheritance Tax Planning page.

Types of Trusts Used for Inheritance Tax Planning

There are several types of trusts commonly used in UK estate planning. The best option depends on your financial goals and personal circumstances.

1. Discretionary Trusts

These give trustees the power to decide how and when to distribute assets to beneficiaries. This flexibility makes discretionary trusts ideal for protecting beneficiaries who are too young, vulnerable, or financially inexperienced to receive a lump sum.

However, these trusts are subject to a 10-yearly IHT charge (known as a “periodic charge”) and may also be taxed on distributions.

2. Bare Trusts

In a bare trust, the beneficiary is entitled to all the assets once they reach 18 (or 16 in Scotland). Although these do not offer tax sheltering beyond the initial gift, they are transparent and simple to manage. Bare trusts can be useful for making gifts to children while avoiding complexity.

3. Interest in Possession Trusts

These provide income to a life tenant (often a spouse), with the capital passing to others upon their death. They are frequently used in blended families to protect a surviving spouse while preserving wealth for children from a previous relationship.

4. Loan Trusts

Loan trusts allow you to loan money to a trust (usually interest-free), with growth on the investment being outside your estate for IHT. You retain access to the capital, giving flexibility for your own needs.

5. Discounted Gift Trusts

With these, you make a gift into a trust but retain a right to a regular income. The “discount” refers to the immediate reduction in your estate’s value, which can lower your IHT bill. These are often used alongside investment bonds and are ideal for clients aged over 60.

How a Trust for Inheritance Tax Works in Practice

Let’s say you want to pass £300,000 to your children but retain control over how the money is used. By putting the funds into a discretionary trust, you remove the amount from your estate for IHT purposes—provided you survive seven years after making the gift. You also avoid giving children direct access to large sums at a young age.

Over time, this can reduce your estate below the £325,000 nil-rate band (or £500,000 with the residence nil-rate band), potentially saving tens of thousands in tax.

How to Set Up a Trust for Inheritance Tax

Creating a trust involves several legal and administrative steps:

1. Choose the type of trust suitable for your goals
2. Appoint trustees you trust to manage the assets
3. Define the beneficiaries and terms of the trust
4. Transfer assets into the trust
5. Register the trust with HMRC under the Trust Registration Service (TRS)

This process requires legal documentation and financial advice. Book a consultation with our team to get expert help tailored to your situation.

Tax Considerations of Using Trusts

Trusts offer powerful tax planning benefits but come with their own rules. Here’s what to be aware of:

Initial Charge

Gifts into some types of trusts may trigger an immediate IHT charge of 20% on amounts above your available nil-rate band.

Seven-Year Rule

Many trusts rely on the donor surviving seven years after setting them up. If not, the gift may still be included in the estate.

Ten-Yearly Charges

Discretionary trusts face a periodic charge of up to 6% every ten years on assets exceeding the nil-rate band.

Exit Charges

When assets leave the trust, a proportionate IHT charge may apply. Understanding these rules is essential for long-term planning.

Refer to the official HMRC guidance on trusts and taxes for more information.

Trusts vs Gifting: Which Is Better?

Gifting assets outright may seem simpler but lacks control and may still be counted for IHT if the donor dies within seven years. Trusts provide more protection, flexibility, and can be structured to handle complex family dynamics. However, they come with more rules and potential charges.

The right choice depends on your goals—whether you’re concerned with control, family needs, or tax efficiency.

When Should You Set Up a Trust?

The best time to create a trust is when:

• Your estate exceeds the inheritance tax threshold
• You want to provide for family but limit access
• You’re looking to protect assets from divorce or creditors
• You want to reduce your IHT bill and protect family wealth

Many families set up trusts in their 50s and 60s as part of retirement and succession planning. Start your planning today to maximise the benefits.

FAQs About Trusts for Inheritance Tax

Is a trust exempt from inheritance tax?

Not always. Trusts are subject to specific IHT rules and periodic charges, but they can reduce the tax owed compared to leaving assets outright.

What’s the seven-year rule?

Gifts into a trust are usually exempt from IHT if the donor survives seven years. If not, the gift may be taxed based on a tapering scale.

Can I be a trustee and still benefit?

You can be a trustee, but if you or your spouse are beneficiaries, it may affect tax treatment. Always seek advice before naming yourself.

Are trusts only for the wealthy?

Absolutely not. A trust for inheritance tax is useful even for modest estates. With rising house prices, many middle-income families benefit from using trusts.

Conclusion: Is a Trust Right for You?

Using a trust for inheritance tax can be a powerful way to protect your legacy, reduce tax, and ensure your wishes are honoured. While trusts do add complexity, the benefits—especially for larger estates or families with special considerations—can far outweigh the costs.

If you’re considering setting up a trust or want to learn how to reduce your IHT bill, book your free consultation now or explore our simple and transparent pricing.