With house prices continuing to rise, tax thresholds frozen since 2009 and pensions to form part of estates from 6th April 2027, , Inheritance Tax (IHT) is no longer a concern only for the very wealthy. More and more families are finding that their estates are now large enough to trigger a significant IHT bill. In fact, HMRC collected over £7.5 billion in IHT receipts in 2023–24 — a record high and a 61% increase compared to just five years earlier.
The good news is that there are steps you can take to reduce or even eliminate your estate’s exposure to IHT. One of the most powerful (but often misunderstood) tools is the use of trusts.
In a rush? Here’s the quick version:
- Trusts can let you pass on assets to beneficiaries in a controlled, tax-efficient way.
- They’re useful for protecting wealth, supporting children or vulnerable people, and reducing IHT.
- There are several types — each suited to different goals and family situations.
- Trusts involve some cost and complexity, so professional advice is essential.
- You can check how much IHT your estate could face with our free IHT Calculator.
What Is a Trust?
A trust is a legal arrangement that allows one person (the “settlor”) to transfer assets to a trustee, who manages those assets on behalf of someone else (the “beneficiary”). Trusts can be set up during your lifetime or written into your Will to take effect on your death.
One of the key benefits of a trust is that it separates the ownership of an asset from its benefit. This means the trustee legally owns and manages the asset, but only the beneficiary is entitled to the income or capital — depending on the type of trust. This structure gives you far greater control over how and when wealth is passed on to others.
What Types of Trusts Are There?
There are several types of trusts used in estate planning. Each comes with different rules and advantages depending on your goals and the needs of your beneficiaries
Bare Trusts
This is the simplest form of trust. The assets are held in the name of a trustee, but the beneficiary has an immediate and absolute right to both the income and capital. These trusts are often used to gift money to children, with the assets becoming fully theirs when they reach adulthood (age 18 in England and Wales). Once the trust is set up it is not flexible and can not be changed.
Discretionary Trusts
In a discretionary trust, the trustee has control over how and when to distribute assets among a group of potential beneficiaries. This offers flexibility and is ideal when the needs of your beneficiaries may change over time. Discretionary trusts are commonly used in tax planning but may face charges when assets are transferred in, every 10 years, and when assets are taken out.
Interest in Possession Trusts
These trusts allow one beneficiary (often a spouse) to receive income from the trust during their lifetime, while the capital passes to another beneficiary, such as a child, at a later date. This type of trust is useful when you want to support one person now while preserving wealth for someone else in future.
Trusts for Vulnerable Beneficiaries
Special tax rules apply to trusts set up for children or adults who are disabled or otherwise vulnerable. These trusts can offer both protection and, if the right criteria are met, favourable tax treatment.
What Are the Benefits of Using a Trust?
Trusts offer a number of advantages, particularly when used as part of a long-term estate plan. Let’s look at the key benefits — and when they apply — with clear examples to bring each one to life.
1. Reduce Your Inheritance Tax Liability
One of the main reasons people use trusts is to reduce the size of their taxable estate. When you gift assets into a trust, they may fall outside your estate for IHT purposes — provided you survive for seven years after making the gift and no longer benefit from the asset.
Example:
Margaret, 72, has a £900,000 estate. She gifts £300,000 into a discretionary trust for her grandchildren. As this falls within her nil-rate band, there’s no immediate tax. If she survives seven years, the gift is then excluded from her estate — reducing its taxable value and potentially saving £120,000 in future IHT.
2. Protect Young or Vulnerable Beneficiaries
If your beneficiaries are young, financially inexperienced, or have additional needs, a trust lets you protect their inheritance while still providing for them.
Example:
James and Priya have a son, Arjun, who has a lifelong disability. They set up a trust for vulnerable beneficiaries in their Wills, ensuring that Arjun will receive financial support throughout his life — without affecting his entitlement to means-tested benefits.
3. Control How and When Assets Are Used
Unlike an outright gift, a trust gives you control over how your assets are used — even after you’re gone. You can delay access until a beneficiary reaches a certain age or allow funds to be used only for specific purposes, such as education or housing.
Example:
Emma and Rob want to leave £200,000 to their two children, aged 12 and 15. Rather than handing over a lump sum when they turn 18, they set up a discretionary trust with instructions for the money to be used for university fees, housing support, and other life events. This helps avoid the risks of handing over a large amount to their children before they’re mature enough to manage it.
4. Safeguard Family Wealth from External Risks
Assets held in a trust are generally protected from claims in the event of a beneficiary’s divorce or bankruptcy. This makes trusts a valuable tool for shielding family wealth from external threats.
Example:
Ben’s son is going through a divorce. If Ben had given his son a direct inheritance, it could have been included in the divorce settlement. By placing the money in a discretionary trust instead, Ben ensures that it remains protected and can be used for his son and future grandchildren.
Do You Pay Inheritance Tax on Trusts?
Yes, but it depends on the type of trust and how it’s used. Some trusts (like bare trusts) are taxed as if the assets belong to the beneficiary, while others (like discretionary trusts) have their own tax rules. The important thing to remember is that placing assets in a trust doesn’t automatically make them IHT-free.
Key Points:
- Gifts into most trusts over £325,000 (your nil-rate band) may trigger a 20% IHT charge when the trust is created
- Discretionary trusts may also face 10-year periodic charges (up to 6%) and exit charges
- Trusts written into a will may be taxed differently, depending on their structure
This is why professional advice is essential when considering a trust as part of your estate plan. The right structure, timing, and ongoing management can make a significant difference.
To see how much IHT your estate could be liable for, use our free IHT Calculator.
Is a Trust Right for You?
Trusts are not just for the super-wealthy. If your estate is likely to exceed the IHT threshold, you want to support young or vulnerable family members, or you simply want more control over how your assets are passed on, a trust could be an excellent option.
At Flying Colours Advice, we take the time to understand your full financial picture — your goals, family dynamics, and long-term priorities — and help you explore whether a trust, or another approach, is the right fit for your estate plan.
If you’re ready to explore the options available, get in touch with our expert advisers for a free, no-obligation chat.