What is a trust and should you use it to reduce your IHT bill?
Changes to inheritance tax (IHT) rules means more people could be subject to tax on their estates. Some families are using trusts to reduce their liabilities, but what are trusts and should you use one?
The number of people enquiring about the use of trusts to protect their wealth has surged in a bid to reduce their IHT liabilities ahead of changes coming into play next year.
From 6 April 2027, unused pension funds will be counted as part of your estate, meaning your loved ones could fall into the IHT trap. The recent scrapping of 100% business property relief and agricultural property relief, legacy wealth planning add to the pressure.
Many people are now reconsidering how their wealth is structured for future generations, and trusts – a way of ringfencing assets – are playing a larger role when it comes to financial plans.
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Wealth management and financial planning firm Quilter has seen growing demand for trusts, reporting a 270% increase in the number of lifestyle trusts opened in 2025 compared with 2024. It expects the uptake for 2026 to surpass this, as more people seek to avoid IHT.
The Trust Registration Service shows there were around 835,000 trusts and estates registered up to 31 March 2025 and that remain open as of 29 August 2025. Though around one in seven were registered in the 2024/25 financial year, when there were 121,000 new registrations, according to Utmost Wealth Solutions.
The sustained increase in trust registrations reflects the growing relevance of trusts as more families are drawn into inheritance tax by the freeze to the thresholds with the nil-rate band (the value your estate must be worth for it to become subject to IHT) remaining frozen at £325,000 since 2009.
Trusts can be a useful way to mitigate IHT liabilities, but their complexity means they may not be right for everyone and should be put in place with careful consideration.
We explain what trusts are and how you can use them in your financial planning and to reduce your inheritance tax bill.
What is a trust?
A trust is “a legal arrangement where assets – money, property, investments – are passed to trustees, who look after them on behalf of beneficiaries,” explains Jude Dawute, managing director of financial advice firm Benjamin House.
“It’s a useful way to control when and how wealth is passed on, to protect assets, and to reduce inheritance tax,” he adds.
Trusts separate an asset’s legal ownership from the beneficial ownership. What this means in practice is that there are always at least three people involved in a trust; the settlor, trustee and beneficiary.
A person known as the ‘settlor’ places assets into a trust. This may be done during their lifetime (a lifetime trust) or can be triggered by death through a valid will (a will trust).
By placing the assets into this structure, the original owner may relinquish some of their rights and give responsibility to a trustee during their lifetime. However, they can gain a lot more control in other ways.
A settlor can project their wishes years into the future. Provided a trust is set up correctly, you can determine who gets what and when with a good deal of precision. Trustees can be professionals (who work for a trust company) or any other competent person prepared to take on these responsibilities.
The trustee is the legal owner of the trust, who has the power to deal with and administer trust’s assets.
Then there is the beneficial owner – the person who actually benefits from the trust, in terms of the use, income or proceeds from the sale of any assets in the trust.
Why would you use a trust?
Trusts can be useful for a number of reasons, mainly:
- to keep assets outside of your estate to avoid inheritance tax;
- to control who receives money and when, especially if children or vulnerable beneficiaries are involved;
- to avoid probate delays, particularly with life insurance payouts;
- to protect wealth across generations.
Trusts can be a powerful tool for estate planning, providing flexibility and control over asset distribution.
There are a number of different types of trust. The most common are:
- discretionary trusts: the most flexible, allowing trustees to decide when and how to distribute money;
- spousal bypass trusts: these protect lump sums like death-in-service payouts from inflating a surviving spouse’s estate;
- bare trusts: the simplest form of trust, where assets are held in the name of the trustee but they have no discretion over the assets held in trust – these are useful if the beneficiaries are children, for example.
Using a trust to avoid inheritance tax
IHT is the gift that keeps on giving for the Treasury, with inheritance tax receipts continuing to rise.
The current inheritance tax rate is 40%. This is payable on anything over the £325,000 threshold, or nil-rate band. However if you own a home you also get a residence nil-rate band. This is currently £175,000.
So you potentially have a personal threshold of £500,000 before inheritance tax is levied against your estate. Couples who are married or in a civil partnership can pass up to £1 million onto direct descendants.
Using trusts can help you reduce your tax liabilities for the portion of your estate that exceeds this threshold.
There are a few ways trusts can be set up to benefit your loved ones while avoiding inheritance tax. You’ll usually want to speak to an expert to help with this though, like a financial adviser, accountant or lawyer, or a combination of the three.
Role of the trustee
Trustees can have very wide-ranging powers and tasks, including settling tax bills and hiring investment management and legal professionals.
If the trust is discretionary (meaning they have discretion regarding the distribution of assets), they might also have to make certain decisions about how to use the trust income and/or capital.
For these reasons, many prefer to have their trust administered by professionals, paying them annual fees from the trust’s assets.
However, others looking to structure family wealth may appoint a mixture of professional and family friend trustees to create a balance of objectivity and personal knowledge of the beneficiaries’ situations and needs.
The seven year rule
If you die within seven years of making a transfer into a trust your estate will have to pay inheritance tax at the full amount of 40%.
This is instead of the reduced amount of 20% which is payable when the transfer is made during your lifetime, unless no inheritance tax was due (IHT might be due if, for example, you were making a transfer into a discretionary trust using an amount above your nil rate band).
If no inheritance tax was due when you made the transfer, but you die within seven years of the transfer being made, the value of the transfer is added to your estate when working out whether any inheritance tax is due.
If you make a gift into any type of trust but continue to benefit from the gift — for example, you give away your house but continue to live in it — you will pay 20% on the transfer and the gift will still count as part of your estate. These are known as gifts ‘with reservation of benefit’.
Advantages and disadvantages of trusts
The main advantages of using trusts in financial planning are:
- they keep wealth out of your estate for IHT planning;
- they help pass money on intentionally, safely and gradually;
- to avoid probate;
- to support multi-generational financial planning.
But some disadvantages are:
- they can be complex if not set up properly;
- trustees have legal responsibilities;
- some trusts may require tax reporting or registration;
- you can’t personally access the funds once they’re in trust.
