Inheritance Tax Planning with Trusts: What You Need to Know

Why It Matters

The inheritance tax nil-rate band (the amount you can leave tax-free) is frozen at £325,000 until April 2031, and property values keep rising, so more families are being drawn into inheritance tax. Planning, including the careful use of trusts, can reduce or manage the bill.

Trust-based planning is not simple. Trusts have their own tax rules, and a badly structured trust can create more tax than it saves.

The Basic Principle

When you transfer assets into a trust, they generally leave your estate for inheritance tax, subject to conditions. The most important is the seven-year rule: if the settlor (the person who sets up the trust) survives seven years after the transfer, it falls outside their estate entirely.

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

Immediate Tax Charges

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

So trust planning must be coordinated with your overall use of the nil-rate band.

The Ten-Year Periodic Charge

Relevant property trusts pay a charge every ten years from the date the trust was set up. The maximum rate is 6% of the value of the trust assets above the nil-rate band. In practice the rate is often lower, but it is an ongoing cost to plan for.

Exit Charges

When capital is paid out of a relevant property trust to a beneficiary, an "exit charge" may apply. The rate is based on the most recent ten-year charge.

Trusts That Avoid These Charges

Not all trusts fall under the relevant property rules:

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

Disabled person's trusts. These have favourable inheritance tax treatment, including exemption from periodic and exit charges.

Charitable trusts. Assets held only for charitable purposes are exempt from inheritance tax.

The "Gift with Reservation" Rule

If you transfer assets into a trust but carry on benefiting from them (for example, you transfer your home but still live in it), HMRC may treat the assets as still part of your estate. Get this wrong and you have the worst of both worlds: cost and complexity with no tax saving.

Changes From April 2026 and April 2027

The Autumn Budget 2024 made major changes to agricultural property relief (APR) and business property relief (BPR). From 6 April 2026 the first £2.5 million of combined agricultural and business property qualifies for 100% relief, with 50% relief above that. The Autumn Budget 2024 first set this allowance at £1 million. The government raised it to £2.5 million in December 2025, before it took effect. The allowance can be transferred between spouses and civil partners, so a couple can pass on up to £5 million of qualifying assets with full relief. This affects farming and business families significantly.

From 6 April 2027, most unused pension funds and death benefits will be included in the estate for inheritance tax. This may prompt families to rethink their overall approach.

Weighing It Up

Trusts can be a valuable part of an inheritance tax plan, but they are not a simple way to dodge tax. They bring complexity, cost and ongoing duties. The tax saving must be weighed against the administration, the risk of unexpected charges and the loss of direct control over the assets.

Any trust set up for inheritance tax should be part of a full estate plan, prepared with a suitably qualified solicitor and, where appropriate, alongside your financial adviser or accountant.

Aaron Johnson is a solicitor and a TEP (a full member of STEP, the Society of Trust and Estate Practitioners). He will tell you plainly whether a trust would help your estate plan.

This guide is general information, not legal advice. Tax rules change. It reflects the law as at September 2026.