How could a trust support your estate plan?

Sep 25, 2026 | 0 comments

Estate planning is a crucial part of your financial plan, particularly as changes to pensions and frozen tax thresholds could mean your loved ones are more likely to pay Inheritance Tax (IHT) in the future.

Fortunately, there are several ways you could potentially mitigate a large IHT bill, as we have covered in our recent articles.

You may remember that when discussing gifting, we briefly explored how paying wealth into a trust instead of passing it directly to your beneficiaries could give you greater control.

However, trusts can be complex, and it’s important to seek professional advice before making decisions.

Read on to learn more about how trusts work and the IHT implications of using them.

A trust allows you to remove assets from your estate

A trust is a legal arrangement that allows you to pass ownership of assets to somebody else.

There are normally three parties involved in a trust:

The settlor (you) – The settlor is the person who creates the trust and appoints trustees to manage the assets.
Trustees – One or more trustees hold the assets on behalf of the settlor and manage them for the beneficiaries, according to the rules of the trust.
Beneficiaries – The person or people who benefit from the assets in the trust.

In practice, this means that instead of gifting wealth directly to your beneficiaries, you place it in the trust. The beneficiaries then receive the assets according to the rules of the trust. This might be when you pass away or if they reach a certain age.

It’s important to consider which type of trust is most suitable for your goals

There are several types of trust that could be suitable, depending on your estate planning goals.

Bare trusts

A bare trust is the most straightforward option. The assets are held on behalf of the beneficiary. They have the right to all the assets and income from them, according to the terms of the trust, provided they are over 18.

You might use a bare trust to pass wealth directly to your loved ones, specifying that they receive it once you pass away.

If the beneficiaries are under 18 when you pass away, the trustee holds the assets until they reach adulthood.

Interest in possession trust

This type of trust passes income from assets to your beneficiaries as it arises during your lifetime. You can also specify that a different beneficiary inherits the assets themselves after you pass away. For instance, you might place shares in a trust and make your spouse the income beneficiary, while leaving the assets to your children.

In this case, your spouse would receive the income, and when they eventually pass away, your children would inherit all the shares.

Discretionary trusts

Discretionary trusts are more flexible and allow you to make specific decisions about how assets are distributed and how income arising from them is used. This could be useful for complex family setups with children from different marriages and grandchildren to consider.

For instance, you might specify that your children inherit your wealth, but a certain portion of it must be used to pay for your grandchildren’s education.

Mixed trusts

A mixed trust can combine functions of different types of trust. While this offers more flexibility, it can also create a complex tax situation as the various parts of the trust may be subject to separate tax rules.

As you can see, it’s important to consider the type of trust that is most suited to your situation and goals, and to seek professional advice before making decisions.

There are Inheritance Tax implications to using trusts

Trusts can be an effective way to reduce IHT because, once you place an asset into a trust, you no longer own it. However, that doesn’t mean that the wealth immediately falls outside your estate for tax purposes.

The normal gifting rules still apply to trusts

When you put wealth into a trust, you may be subject to the same rules as if you made a direct gift to a beneficiary.

Under these rules, any wealth up to the £325,000 nil-rate band (the amount you can pass on without IHT) that you place in a trust or gift will be free from IHT.

Also, the first £3,000 you gift each year – your annual gifting allowance – falls outside of the estate right away. However, further gifts that exceed the nil-rate band and gifting allowances may be treated differently, depending on the type of trust you use.

If you’re using a bare trust, payments will be considered potentially exempt transfers (PETs). You must survive for seven years after making the transfer before the wealth becomes IHT-free.

Should you pass away within the seven-year timeframe, there may be some IHT to pay.

You can read our article – ‘Worried about making lifetime gifts? Here’s how financial planning could help’ – for more information on gifting rules.

Using a trust could reduce the rate of Inheritance Tax

Payments into other types of trusts – such as discretionary trusts – are often considered chargeable lifetime transfers (CLT) and may immediately trigger an IHT charge. However, this will be at a rate of 20% instead of the standard 40%.

Further to this, trusts might attract IHT charges at certain points:

Every 10 years – Assets in excess of the £325,000 nil-rate band may attract an IHT charge of up to 6% every 10 years.
Exit charges – There may be an exit charge of 6% on assets when they leave a trust.

Because of these complex rules, placing wealth in a trust doesn’t immediately circumvent IHT. However, although your beneficiaries may still receive an IHT bill, they could pay less than the full 40% rate in certain circumstances, provided the arrangement is set up correctly.

A trust also offers more control over your estate and how assets are divided, so you can ensure your wishes are fulfilled.

Get in touch

The rules around trusts can be incredibly confusing, and making decisions without guidance could lead to a higher-than-expected IHT bill for your family.

Fortunately, we can help you use trusts to your advantage and leave as much of your estate to loved ones as possible.

Please email enquiries@integritasfp.co.uk or call 01283 777014 to find out more.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning, estate planning, or trusts.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.