Trusts have a reputation for being complicated or only relevant to the very wealthy. In practice, they are a well-established tool used by many families every day to protect their assets and reduce the amount of Inheritance Tax their estate has to pay. This article explains how trusts work in the context of Inheritance Tax planning and the options that are available.
Why trusts matter for Inheritance Tax
When you place assets into a trust, you transfer legal ownership of those assets to trustees who manage them for the benefit of the beneficiaries you name. In some cases, this can help reduce the value of your estate for Inheritance Tax purposes and potentially lower the amount of IHT payable.
The key principle is that you must genuinely give up control and benefit from the assets, as keeping a benefit from assets you have placed into trust can mean the assets may still be treated as part of your estate.
The Inheritance Tax treatment of trusts depends on the type of trust used and the assets involved. Some trusts can also create their own tax charges, including lifetime IHT charges, ten-year charges, and possible capital gains tax implications.
Because trust and Inheritance Tax rules are complex, it’s important to take Inheritance Tax advice before setting up a trust or transferring assets into one.
Types of trust used in IHT planning
Bare trusts
A bare trust holds assets on behalf of a named beneficiary who has an absolute right to the assets once they reach 18. These are simpler and often used for gifting to children or grandchildren. For IHT purposes, the transfer into a bare trust is treated as a potentially exempt transfer, meaning it falls outside your estate after seven years.
Discretionary trusts
A discretionary trust gives trustees the power to decide who benefits from the trust, when, and how much. The beneficiaries are named in the trust deed but have no automatic right to the assets. This flexibility makes discretionary trusts useful in a range of planning scenarios.
For Inheritance Tax purposes, transferring assets into a discretionary trust is a chargeable lifetime transfer. You can transfer up to your nil rate band (currently £325,000) without an immediate IHT charge. Amounts above this are subject to a 20% charge at the time of transfer, with a periodic charge every ten years and an exit charge when assets leave the trust.
Loan trusts
A loan trust is a common planning tool that allows you to lend money to a trust rather than gifting it outright. The loan amount remains in your estate, but any growth on the investment within the trust is outside your estate. This is particularly useful for people who want to retain access to the original capital while allowing future growth to pass to beneficiaries free of IHT.
Interest in possession trusts
In this type of trust, a beneficiary has the right to receive income from the trust assets during their lifetime, but the underlying capital passes to others when that beneficiary dies. These trusts have specific IHT rules depending on when they were set up.
| Trust type | IHT treatment | Key benefit | Key risk |
|---|---|---|---|
| Discretionary trust | Chargeable lifetime transfer – uses nil rate band | Flexible – trustees control who benefits and when | 10-year periodic charge; exit charges apply |
| Bare trust | Potentially exempt transfer – falls out of estate after 7 years | Simple, good for gifts to children/grandchildren | Beneficiary has absolute right to assets at 18 |
| Interest in possession | Depends on date created – specific IHT rules apply | Income to one beneficiary, capital to another | Rules complex; seek advice before setting up |
| Loan trust | Loan remains in estate; growth outside estate | Retain access to capital; pass growth to heirs | No 7-year rule benefit on the loan itself |
The seven-year rule and gifts in trust
Most gifts in trust start the clock on a seven-year period. If you survive seven years from the date of the transfer, the gift falls completely outside your estate for IHT purposes. If you die within seven years, taper relief may reduce the tax payable depending on how many years have passed.
For transfers that exceed the nil rate band, an immediate IHT charge applies as described above. The interaction between the nil rate band, taper relief, and trust charges is another reason why professional Inheritance Tax planning is so important.
Can you still benefit from assets in a trust?
This is a common question and an important one. If you place your home into a trust but continue to live in it rent-free, HMRC treats this as a gift with reservation of benefit. The property remains in your estate for IHT purposes.
There are specific arrangements, such as a discounted gift trust or a carefully structured home loan scheme, where some level of retained benefit is possible. But these need specialist advice and careful setup.
Trusts and the April 2027 pension changes
From April 2027, inherited pension pots will fall within the scope of Inheritance Tax. This changes the planning picture for many people who currently hold significant defined contribution pensions. Trusts may play a role in some strategies alongside pension planning. The rules are still being finalised, which makes taking advice now, while you have the most options available, particularly important.
Are trusts right for you?
Trusts are not a one-size-fits-all solution. They involve legal costs to set up, ongoing administration, and a degree of complexity. For some people, simpler strategies such as using annual gift allowances, writing life insurance policies in trust, or carefully structuring wills will achieve the most important objectives without the need for a formal trust arrangement.
For larger estates or where assets are more complex, trusts can be highly effective. Our advisers at Beaumont Wealth can work through the options with you. Visit our Inheritance Tax planning page or contact us to arrange a conversation.
Frequently asked questions
Do trusts avoid Inheritance Tax?
A trust does not automatically avoid Inheritance Tax. Assets placed into trust may fall outside your estate after seven years (for potentially exempt transfers) or may reduce your estate immediately (for chargeable lifetime transfers within the nil rate band). The key is that you must genuinely give up control and benefit. The tax treatment depends on the type of trust and the circumstances.
What is the 10-year periodic charge on trusts?
Discretionary trusts are subject to a periodic Inheritance Tax charge every 10 years. The charge applies to the value of assets held in the trust above the available nil rate band at that time, at a maximum rate of 6%. This is a relatively modest charge compared to the potential IHT saving if assets have grown significantly.
Can I put my house in a trust to avoid Inheritance Tax?
You can transfer your home into a trust, but if you continue to live in it without paying a full market rent, HMRC will treat this as a gift with reservation of benefit, and the property will remain in your estate. There are some specific arrangements where this can be structured differently, but they require careful specialist advice.
Talk to Beaumont Wealth about trust planning
Trust planning is one area where getting the structure right from the start is essential. Our Chartered, independent advisers will help you understand whether a trust is the right tool for your situation and, if so, which type makes most sense given your estate, your family, and your goals.
Book your free initial appointment or call us today.
Important information
This article is intended for information purposes only and does not constitute personal financial advice. Trust and tax legislation is complex and subject to change. The information reflects our understanding of current rules as at April 2026. Tax treatment depends on individual circumstances. Beaumont Wealth is authorised and regulated by the Financial Conduct Authority.
