How you could use trusts to reduce a potential Inheritance Tax bill

Having a plan in place for how you’ll pass on your wealth to loved ones could help you reduce the potential Inheritance Tax (IHT) bill they might face.

According to figures published by FTAdviser, IHT receipts between April and July 2023 rose by £0.2 billion compared to the same period the previous year. And with IHT thresholds frozen until 2028, more families will likely be required to pay IHT.

However, putting some of your assets in trust could help you pass on wealth tax-efficiently.

Read on to find out more about IHT and how you may be able to use trusts to cut a potential IHT bill. Then, learn four key steps to setting up a trust.

Your loved ones may face an Inheritance Tax bill if your estate exceeds certain thresholds

IHT is a tax your beneficiaries may have to pay when they inherit your estate. It applies to:

  • Cash savings
  • Investments, such as ISAs
  • Property and other assets.

Pensions are usually exempt from IHT.

The standard IHT rate is 40%. However, IHT is only charged on the amount of your estate that exceeds the nil-rate tax band, which is currently £325,000 (2023/24).

Additionally, if you leave your home to your children or grandchildren, you can 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.

If you’re married or in a civil partnership, you could combine your allowances and potentially pass on up to £1 million without your beneficiaries having to pay IHT.

Any assets you hold at the time of your death that exceed these thresholds could result in an IHT charge. So, you may be interested to learn how you could use trusts to reduce a potential IHT bill and pass on more of your wealth to loved ones.

Placing assets in a trust could help you reduce a potential Inheritance Tax bill

If the value of your estate is likely to exceed the nil-rate bands, you could mitigate a large IHT bill by placing some assets in a trust.

As the “settlor”, you could put assets including cash, property, or investments in a trust and select a “trustee” to safeguard them until they pass to your intended “beneficiary”.

For example, you might leave some investments in trust for your children to access when they reach 18 years old.

The benefit of using trusts is that generally, any assets held in them no longer belong to you, and as such, will not be considered part of your estate for IHT purposes – provided that you survive for seven years after placing them in trust.

However, trusts are not completely free from IHT. Depending on which type of trust you choose, you may have to pay some tax at different times in the trust’s lifecycle:

  • When setting up a trust – usually 20% IHT is payable on assets that exceed your nil-rate band.
  • Each 10-year anniversary – you’ll normally pay 6% on the value that exceeds the nil-rate band.
  • When the trust is closed – if the trust is closed or assets are withdrawn, your beneficiaries may have to pay up to 6% tax.

So, while placing assets in a trust may not eradicate an IHT bill, it could mean that your family pays significantly less than the standard 40% rate.

However, the rules can be complex, so it might benefit you to speak to a financial professional who can explain your options and guide you through the process of setting up a trust.

4 important steps in setting up a trust

You might choose to set up a trust during your lifetime or you could include one in your will.

There are four key steps to setting up a trust, which a financial planner can help you navigate:

  1. Decide which assets you want to place in trust.
  2. Choose who the trustees and beneficiaries are.
  3. Identify the type of trust that meets your needs.
  4. Stipulate when the trust will become active.

There’s lots to think about when setting up a trust – being a trustee is a significant responsibility, so you’ll want to think carefully about who to ask. And choosing which type of trust to use may feel overwhelming, as there are many options to choose from.

For example, a “bare trust” is the simplest kind of trust, which can be used to hold assets until the beneficiary turns 18 in England, Wales and Northern Ireland, or age 16 in Scotland. On the other hand, a “trust for vulnerable beneficiaries” may be more suitable for a disabled or orphaned child as they may pay less tax on income and profits from the trust.

So, it might be helpful to speak to a financial professional who can help you understand your options and make a personalised financial plan.

Get in touch

If you have further questions about setting up a trust to provide for your loved ones, we can help.

Please get in touch either by email at or by calling 0117 9303510.

Please note

This article 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.

More blogs

06 Mar 2024

All the winners and losers from the 2024 Spring Budget

Read more

06 Mar 2024

Your Spring Budget update – the key news from the chancellor’s statement

Read more

Steve and the team understand me and my aspirations, and they have guided me along the way

Anne Williams

Working with Steve has helped us feel confident about our financial future

Eddie & Debbie

The advice I've received from Ian and Aspire has been invaluable

Miles Watson

I can look forward to a long and happy retirement

Nicki Machin

I feel as though I have an ally, helping me navigate my finances

Raj Bahia

I feel confident in my financial future, thanks to The Aspire Partnership

John Grainger