Trusts can be a very useful estate planning tool, but they do not automatically avoid inheritance tax. In the UK, the inheritance tax treatment of a trust depends on the type of trust, the assets placed into it, the value transferred, and whether the person creating the trust continues to benefit from those assets. In some cases, a trust can help reduce the taxable value of an estate. In others, it can create its own inheritance tax charges.
For that reason, trusts should never be sold as a simple “inheritance tax avoidance” solution. Used properly, they can form part of a sensible estate plan. Used badly, they can increase complexity, costs, and tax exposure.
A trust is a legal arrangement where one person, known as the settlor, places assets under the control of trustees for the benefit of one or more beneficiaries. Those assets might include money, investments, property, or life insurance policies. Trusts are often used to control how wealth is passed on, protect vulnerable beneficiaries, or plan more carefully for the future.
From an inheritance tax point of view, the key issue is whether the assets in the trust still form part of the settlor’s estate, or whether they fall into a separate tax regime. That is where the detail really matters.
The honest answer is: sometimes they can help, but not always. A trust may remove assets from your estate for inheritance tax purposes, but that does not mean the transfer is tax-free. Some transfers into trust are immediately chargeable to inheritance tax, and some trusts can face ongoing charges every 10 years and when assets leave the trust.
Also, if you put assets into trust but continue to benefit from them, HMRC may treat this as a gift with reservation of benefit. In that situation, the assets may still be counted as part of your estate on death, which can completely undermine the planning.
Many people know about the seven-year rule for gifts, but transfers into trust are not always treated the same way as outright gifts to individuals. Some lifetime transfers into trust are immediately chargeable, depending on the trust type and the value involved.
Relevant property trusts, including many discretionary trusts, can face:
exit charges when assets leave the trust
HMRC guidance states that the 10-year charge can be up to 6% of the value of the relevant property in the trust after reliefs.
If the settlor still benefits from the trust assets, HMRC may argue there has been a reservation of benefit. A common example is giving away an asset but continuing to enjoy it. That can mean the asset remains inside the estate for inheritance tax purposes.
4) The residence nil-rate band does not apply to lifetime transfers into trust
This is an important point people often miss. The residence nil-rate band does not apply to gifts and lifetime transfers, including transfers into trust. So if a family home is transferred into trust during lifetime, that extra allowance may not help in the way people expect.
With a bare trust, the beneficiary has an immediate and absolute right to the trust assets. In practice, bare trusts are usually more transparent for tax purposes and are not normally the first choice where the aim is long-term inheritance tax planning. They can still be useful in some family situations, but they are not a magic solution for reducing inheritance tax.
Discretionary trusts are often used because they offer flexibility. Trustees can decide who benefits, when, and by how much. That flexibility can be attractive for family protection and control, but many discretionary trusts fall within the relevant property regime, meaning they may face 10-year and exit charges.
Interest in possession trusts
An interest in possession trust gives a beneficiary a present right to trust income, or in some cases the right to benefit from the asset itself. The inheritance tax treatment depends heavily on when the trust was created and whether it qualifies under specific rules. This is an area where tailored advice is especially important.
One common and practical use of trusts is to hold a life insurance policy outside the estate. When arranged correctly, the policy proceeds may not form part of the deceased’s estate, which can help the money reach beneficiaries more quickly and reduce inheritance tax exposure on the payout itself.
A trust may be helpful where:
you want to move value out of your estate in a structured way
you want to control how beneficiaries receive money
you are planning for children, blended families, or vulnerable beneficiaries
you want to place a life policy outside your estate
you want a wider estate plan rather than relying on a will alone
The benefit is usually not that inheritance tax simply disappears. The real value is that a trust can form part of a broader strategy involving wills, gifting, exemptions, business or agricultural reliefs where available, and long-term planning.
One of the biggest mistakes is assuming that placing assets into trust automatically removes them from the estate. That is not always true. If the transfer is chargeable, if the trust has ongoing tax charges, or if the settlor keeps benefiting from the asset, the planning may not work as intended.
Another mistake is putting the family home into trust without understanding the wider consequences. Aside from inheritance tax issues, there can be practical, legal, and tax complications, including the loss of the residence nil-rate band on lifetime transfers into trust.
Poor record-keeping is another common problem. Valuations, dates of transfer, trust paperwork, and ongoing administration all matter. Errors can create delays, disputes, and unexpected tax liabilities.
Trusts can be extremely useful in estate planning, but they are not a guaranteed way to avoid inheritance tax. In some cases, they can reduce the value of an estate for inheritance tax purposes. In others, they create their own tax regime with entry, 10-year, or exit charges. Everything depends on the trust structure and the wider estate plan.
For most people, the better question is not “Do trusts avoid inheritance tax?” but “Is a trust the right tool for my family, my assets, and my long-term plans?” Good estate planning is about control, protection, clarity, and tax efficiency working together.
If you are considering setting up a trust, it is important to take professional advice based on your personal circumstances.
For professional advice → contact us at Evans Legacy Planning
Enter your details below, and one of our expert advisors will contact you within 24 hours to arrange your free, no-obligation consultation. Together, we’ll ensure your family’s legacy is protected for generations to come.
Note: We respect your privacy. Your details will only be used to arrange your consultation and will never be shared.
