Inheritance Tax Planning with Trusts: What You Need to Know

Inheritance Tax Planning with Trusts: What You Need to Know

The Opportunity

With the IHT nil-rate band frozen at £325,000 until at least April 2030, and property values continuing to rise, more families are finding themselves within the scope of inheritance tax. Effective estate planning — including the strategic use of trusts — can help reduce or manage this liability.

However, trust-based IHT planning is not straightforward. Trusts have their own tax regime, and a poorly structured arrangement can create more tax liability than it saves.

The Basic Principle

When you transfer assets into a trust, those assets are generally removed from your estate for IHT purposes — subject to certain rules and conditions. The most important is the "seven-year rule": if the settlor survives for seven years after making a chargeable lifetime transfer, the transfer falls outside the estate entirely.

If the settlor dies within seven years, the transfer is brought back into the estate, though "taper relief" may reduce the tax if death occurs between three and seven years after the transfer.

Immediate Tax Charges

Transfers into most trusts — specifically discretionary trusts and most other "relevant property" trusts — are chargeable lifetime transfers. If the total value of chargeable transfers in the previous seven years exceeds the nil-rate band (£325,000), there is an immediate IHT charge of 20% on the excess.

This means that trust planning must be carefully coordinated with your overall use of the nil-rate band.

The Ten-Year Periodic Charge

Relevant property trusts are subject to a periodic charge every ten years from the date the trust was established. The maximum rate is 6% of the value of the trust assets above the nil-rate band. In practice, the effective rate is often lower, but it represents an ongoing cost that must be factored in.

Exit Charges

When capital is distributed from a relevant property trust to beneficiaries, an "exit charge" may apply. The rate is calculated by reference to the most recent ten-year periodic charge.

Trusts That Avoid These Charges

Not all trusts are subject to the relevant property regime:

Bare trusts. Assets in a bare trust are treated as belonging to the beneficiary. Transfers into a bare trust are potentially exempt transfers (PETs) — meaning they fall out of the estate entirely if the settlor survives seven years. There are no periodic or exit charges.

Disabled person's trusts. These benefit from favourable IHT treatment, including exemption from periodic and exit charges.

Charitable trusts. Assets held for exclusively charitable purposes are exempt from IHT.

The "Gift with Reservation" Rule

If you transfer assets into a trust but continue to benefit from them — for example, you transfer your home but continue to live in it — HMRC may treat the assets as still forming part of your estate. Getting this wrong can result in the worst of both worlds — complexity and costs without any IHT saving.

Changes From April 2026

The Autumn Budget 2024 announced significant changes to agricultural property relief (APR) and business property relief (BPR). From April 2026, the combined value of assets qualifying for 100% APR or BPR will be capped at £1 million, with relief at 50% above that threshold. This will affect farming and business families significantly.

Additionally, from April 2027, unused defined contribution pension funds are expected to become part of the estate for IHT purposes — another change that may prompt families to reconsider their overall approach.

The Bottom Line

Trusts can be a valuable component of a well-designed IHT strategy, but they are not a simple "tax dodge." They involve complexity, cost, and ongoing obligations. The tax savings must be weighed against the administrative burden, the potential for unexpected charges, and the loss of direct control over the assets.

Any trust established for IHT purposes should be part of a comprehensive estate plan, prepared with professional advice from a suitably qualified solicitor and, where appropriate, in collaboration with your financial adviser or accountant.

At Safe Harbour Legal, Aaron Johnson is a STEP-qualified solicitor with expertise in trust and estate planning. We can help you understand whether a trust would genuinely benefit your estate plan.

This guide is intended as general legal information and does not constitute legal advice. Tax rules are subject to change, and the information in this guide is based on the law as at March 2026. Safe Harbour Legal is a trading name of Legal Studio, authorised and regulated by the Solicitors Regulation Authority.