Trusts · 11 min read · Published · Updated
Inheritance tax planning with trusts: what you need to know
How trusts can reduce inheritance tax, the charges they carry and the rules that catch people out.
By Aaron Johnson, Consultant Solicitor and TEP, a solicitor in Bridlington who writes every guide himself.
This guide is general information about the law of England and Wales, not legal advice. Each case is assessed on its own merits.
Guides · Trusts · No. 10 of 12Reviewed · 11 minutes
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.
How inheritance tax applies to an estate
Change the size of an estate and see which allowance covers each part.
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. Your chargeable transfers in the previous seven years reduce the nil-rate band of £325,000. There is an immediate inheritance tax charge of 20% on any part of the new transfer above what is left.
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. In the first ten years, the rate is based on the rate set when the trust began. After that, it is based on the most recent ten-year charge. There is no exit charge in the first three months after the trust starts or after a ten-year anniversary.
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. Property held for charitable purposes only is outside the relevant property rules, so there is no ten-year charge. But the charity exemption now applies only to gifts to a UK charity or a registered community amateur sports club. A charitable trust qualifies only if it is itself a UK charity. This applies to lifetime gifts from 26 November 2025 and deaths from 6 April 2026.
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 qualifying agricultural and business property gets 100% relief, with 50% relief above that. Qualifying shares on the Alternative Investment Market (AIM), or other markets that do not count as listed, get only 50% relief. They do not use the allowance. 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. Prepare it with a suitably qualified solicitor and, where appropriate, your financial adviser or accountant.
Aaron Johnson is a solicitor and 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.
Sources
The official pages behind the rules this guide explains. Each was checked on .
Written by Aaron Johnson, Consultant Solicitor and TEP · Law of England and Wales as at 11 June 2026 · Ends
