Could using trusts be a tax-efficient way to pass on your wealth?

If you’ve spent years building your wealth to ensure that your loved ones are taken care of after you’re gone, choosing when and how to pass your money on tax-efficiently are important considerations.

According to Money Marketing, HMRC’s Inheritance Tax (IHT) receipts for April to September 2023 were £3.9 billion, £400 million higher than the same period in the previous tax year.

Fortunately, effective estate planning could help you reduce a potential IHT bill for your loved ones.

Trusts are often underestimated and underused tools for passing on wealth, but they could offer several useful benefits.

Read on to find out more about how trusts work and learn about the benefits and limitations of using them for IHT planning.

What trusts are and how they work

A trust is a legal arrangement where you give assets – cash, property, or investments – to a “trustee” to look after until they are passed on to your intended “beneficiary”.

There are several different types of trust, and you can choose whether to set one up during your lifetime or establish trusts in your will.

Three of the most commonly used trusts are:

Bare trust

This is the simplest kind of trust, and it can be set up during your lifetime. You could choose a bare trust to hold assets on another person’s behalf until they are old enough to take ownership.

The beneficiaries have absolute rights to the assets held in trust – when they reach 16 in Scotland, or 18 in the rest of the UK – and the trustee must act in accordance with their instructions.

Discretionary trust

This is one of the most popular types of trust with individuals who wish to set up a trust during their lifetime.

You can stipulate how you’d like the assets to be used for your beneficiaries, but your chosen trustees can use their discretion to make investment decisions and decide how the assets are distributed to the named beneficiaries.

Interest in possession trust

These are usually included in a will. The beneficiary can receive an income from the trust as soon as it has been set up, but they don’t have a right to the assets that generate the income.

This is not an exhaustive list of all the trusts you could choose from. A financial planner can explore all your options and help you choose the type of trust that meets your needs.

How using trusts could help you mitigate a potential Inheritance Tax bill

Usually, any assets you place in a trust will fall outside of your estate for IHT purposes.

IHT is a tax your beneficiaries may have to pay when they inherit your estate and the standard IHT rate is 40%. However, it is only charged on the amount of your estate that exceeds the nil-rate tax band, which is £325,000 (2023/24).

In addition, if you leave your home to your children or grandchildren, you may be able to use your residential nil-rate band, which is £175,000 for the 2023/24 tax year, to increase your tax-free threshold to up to £500,000. Married couples or those in a civil partnership, could combine their allowances and pass on up to £1 million without an IHT charge.

Your beneficiaries could be charged IHT on any assets that exceed these thresholds.

Fortunately, trusts could help you mitigate a potential IHT bill.

Generally, when you put assets in a trust, they no longer belong to you (instead they belong to the trust) and will not be considered part of your estate for IHT purposes – provided that you survive for seven years after placing them in trust.

However, depending on which type of trust you choose, you may have to pay:

  • 20% IHT when setting up the trust – you’ll usually pay 20% on the amount of the assets placed in trust that exceed your nil-rate band.
  • 6% IHT each 10-year anniversary – the assets held in trust will need to be re-valued each decade and you’ll normally pay 6% on the value that exceeds the nil-rate band.
  • Up to 6% tax when the trust is closed – if the trust is closed or assets are withdrawn, up to 6% tax may be payable based on the most recent 10-year anniversary valuation.

Even if some IHT is due, your beneficiaries may pay less than the standard 40% rate if you pass on wealth through a trust. Also, by placing assets in a trust, you could reduce the size of your estate for IHT purposes.

Selecting the type of trust that suits your needs can be complicated so it might be helpful to speak to a financial planner.

Benefits of using trusts to pass on wealth

Your loved ones may pay less Inheritance Tax

Placing assets in trust could reduce a potential IHT bill.

Paying less than the standard 40% rate could mean that your loved ones receive more of your wealth.

You can take control over how your assets are used

Not only can you stipulate who the beneficiaries of a trust are, you can place conditions on when and how they are allowed to access the funds.

So, you could use a trust to make your wishes clear – potentially reducing the risk of disputes after you’re gone – while also protecting your interests.

Peace of mind that loved ones are provided for after you’re gone

A trust can be a helpful way of protecting people who are too young or vulnerable to handle their finances independently.

For example, you might set up a “trust for vulnerable beneficiaries” to ensure that a loved one with distinct needs is provided for after you’re gone. Some such trusts benefit from special tax treatment – there’s usually less tax to pay on income and profits.

Limitations of using trusts for Inheritance Tax planning

You could lose control over a valuable asset

The assets you place in trust no longer belong to you, but the trust. The trustee assumes control over the assets that ultimately pass to the beneficiary.

So, by placing assets in trust, you could lose control over a valuable asset – for example, your family home or other property. While trusts can be made revocable, this often has negative financial implications.

Your loved ones may still face an Inheritance Tax bill

Placing assets in trust is unlikely to remove an IHT charge altogether.

The amount of IHT payable will depend on the type of trust you decide to use and how long you live after putting assets in trust.

The rules around trusts can be complex

You might find it difficult to navigate the complex rules around trusts and if expectations are not made clear, this could place an onerous responsibility on the trustee.

A financial professional can help you get to grips with the rules and explain how the different types of trusts might fit with your financial goals.

Get in touch

If you’d like to learn more about using trusts to pass on your wealth tax-efficiently, we’d love to hear from you.

Please email us at or call 0345 505 3500.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients 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 estate planning, tax planning, or will writing.