Set up a trust to reduce the inheritance tax you pay, experts have said (Image: Halfpoint Images via Getty Images)
Increasing numbers of families are being dragged into the inheritance tax trap – and many are responding by using a simple legal tactic that could save their relatives thousands of pounds. With tax thresholds staying frozen and house prices rising, setting up a trust is quickly becoming the go-to approach to protect more of your assets from HMRC. Figures show a growing number of people are taking these precautionary steps. Around 121,000 trusts were registered during the 2024-25 tax year, up from 115,000 the year before, bringing the total number of trusts across the UK to at least 825,000, according to official HMRC data.
Trusts can offer potential inheritance tax savings, which is becoming increasingly important as more estates fall liable for the charge. The inheritance tax threshold has stayed frozen at £325,000 since 2009, and is set to remain at that level until at least 2030. Had the threshold risen in line with inflation, it would now stand at roughly £500,000, meaning far fewer families would face a tax bill. Instead, rising property prices and growing asset portfolios have pushed people over the limit. Inheritance tax is normally charged at 40% on estates above the threshold, though this could fall to 36% if at least 10% is left to charity. The Treasury expects inheritance tax receipts will hit £14.5 billion annually by 2030-31.
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How a trust can help avoid inheritance tax
A trust is a legal arrangement where assets are handed to trustees for the benefit of designated beneficiaries. These assets can include cash, property, shares, land, and even precious items such as jewellery and artwork.
It comprises three key roles: the settlor, who transfers assets into the trust; the trustee, who manages them; and the beneficiary, who eventually benefits from the trust.
The most substantial inheritance tax advantages arise from a straightforward seven-year rule. The UK government says that if the person creating the trust lives for at least seven years following the transfer of assets into a trust, those assets will generally fall outside their estate – meaning no inheritance tax is payable on them.
« When assets are transferred into certain types of trusts, they are typically considered outside the settlor’s estate for inheritance tax purposes, » explains Laura Whetstone, Wealth Advisor at DS Burge & Co. « This reduction in the estate’s value can significantly lower the inheritance tax liability, especially for estates that exceed the threshold. »
Nevertheless, that doesn’t mean you entirely avoid tax. If assets worth over £325,000 are transferred into certain types of trusts, an immediate 20% inheritance tax charge may be triggered, with further charges possible every 10 years, and when assets leave the trust.
HMRC tax letter (Image: Getty)
How to set up a trust
There are various types of trusts in the UK, each with different rules and purposes. Determine which you prefer.
- Bare trust: Assets are held for a beneficiary who can access them once they turn 18 (or 16 in Scotland)
- Interest in possession trust: The beneficiary receives income from the trust, but the capital passes to others later
- Discretionary trust: Trustees decide who benefits and when
- Life insurance trust: Commonly used to exclude a life insurance pay-out from your estate for inheritance tax purposes
- Trusts for minors or vulnerable people: Protect money for children or those unable to manage finances themselves
After choosing which assets to place in the trust, you’ll need to appoint trustees to manage it. You can select family members, use professional trustees like solicitors or accountants, or opt for a mixture of both.
You must then create a trust deed – a legal document setting out the trust’s objectives, naming trustees and beneficiaries, and outlining rules for how assets should be managed and distributed. Following this, registration with HM Revenue & Customs (HMRC) via the Trust Registration Service (TRS) is necessary.
Registration is mandatory when the trust produces taxable income, capital gains, or contains assets worth more than £100. Once registered, you’ll receive a unique trust registration number needed for tax returns.
Keeping precise records and filing tax returns is crucial, as HMRC enforces penalties for failing to comply. Furthermore, obtaining professional advice is recommended, considering the intricate nature of setting up a trust.
« Trusts are valuable in inheritance tax planning, offering flexibility and opportunities for potential inheritance tax savings, » reads the DS Burge & Co website. « They allow individuals to manage their assets during their lifetime and ensure a smooth transfer of wealth to their beneficiaries after death. However, trusts are not universally applicable; each individual’s financial situation and goals are unique.
« Therefore, careful consideration must be given to the type of trust that best meets your needs, the responsibilities of the appointed trustees, and the potential tax implications involved. »
