Trust Planning and Inheritance Tax

Reducing your inheritance tax bill isn’t always straightforward – especially when trusts are involved.

One of the trickier areas to understand is how trust planning and inheritance tax align. But making the most of inheritance tax trusts is crucial because these structures can help you pass on your wealth efficiently to those you care about most.

This article answers what is a trust, the main types of trusts UK families use, how they align with inheritance tax bill reduction and how we can help you use trust planning effectively.

Why use a trust?

Trusts can help you reduce your inheritance tax bill, which is becoming more and more pertinent given that IHT allowances have been frozen for years now. Because of the freeze, increasing amounts of people are being pulled into the IHT net while asset values, particularly property, have simultaneously risen. Additionally, pensions are due to become part of a person’s estate in 2027, so yet more people will likely have IHT due at their death.

Trusts are therefore a crucial part of UK inheritance tax planning because they can help you:

• Pass on wealth in a tax-efficient way
• Give long-term support to vulnerable beneficiaries
• Shield family wealth from divorce or bankruptcy
• Manage assets for beneficiaries
• Control the timing and how trust assets are distributed
• Reduce or delay inheritance tax
• Help avoid probate so assets can be accessed more quickly

Given their benefits, it’s vital to use inheritance tax trusts appropriately. When they’re misused, you may leave your heirs liable to unexpected taxes and you’ll not have achieved what you set out to do.

What is a trust?

A trust is a legal arrangement where one party looks after assets for another party. There are three key roles in the arrangement:

• Settlor – the person who puts assets into the trust
• Trustees – the individuals responsible for managing the trust
• Beneficiaries – those who benefit from the assets held in the trust.

In practice, this means that the settlor transfers assets to the trustees, who then manage those assets for the beneficiaries under the rules set out by the settlor.

What types of trust are there?

There are many different types of trust in the UK. Not all will be appropriate for you to use, but with the right structure, you can support effective trust planning and inheritance tax management.

What is the seven-year rule?

If you gift assets, whether they go into a trust or not, they can fall outside your estate for IHT purposes, which is known as a Potentially Exempt Transfer (PET).

This only happens if you live for another seven years (at least from the date of the gift). However, if you die within seven years, IHT can be due – though it is tapered.

The timing of gifting assets underscores why it is crucial to start estate planning as soon as possible.

How to use trusts to reduce Inheritance Tax

When used as a part of a wider estate planning strategy, trusts can be highly effective at reducing IHT bills. To make the most of them, it can be a good idea to:

• Transfer assets into a trust as early as possible
• Make full use of nil-rate bands and personal allowances
• Combine trusts with life insurance to provide cash to pay any future IHT bill
• Avoid gifts with reservation of benefit
• Balance control of your assets against IHT reduction effectiveness

Advantages and disadvantages of using trusts

Trusts are only effective when used properly and appropriately. That means being fully aware of the advantages and disadvantages to their structures and implementation.

Trust planning strategies for Inheritance Tax

The most effective trust planning and inheritance tax strategies include:

• Starting early
• Combining trusts with other allowances and exemptions
• Maintaining flexibility through discretionary trusts
• Regular reviews so you can update your plans to reflect your current needs and circumstances properly
• Maintaining up-to-date records and documentation for HMRC

How our financial advice service can help

If you’d like to explore how trusts could fit into your overall inheritance tax strategy, we’d love to help. We can help you navigate the complexities of trust planning and inheritance tax so your wealth goes where you want it to.

You can contact us here.

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