Inheritance Tax Planning with Trusts

Trusts are one of the longer standing tools for managing inheritance tax, letting you pass on assets earlier while keeping some influence over how and when beneficiaries actually benefit. They are not a way of avoiding tax altogether, and getting the structure wrong can create charges of its own, so it is worth understanding how the rules actually work before assuming a trust is the right answer.

How a trust removes assets from your estate, and when it does not

Putting assets into most trusts is treated as a chargeable lifetime transfer for inheritance tax purposes. If the value transferred is within your available nil rate band, currently £325,000, there is no immediate charge. Anything above it is usually charged at 20% at the time. If you die within seven years, the tax is recalculated at 40%, with credit for the 20% already paid and taper relief reducing it after three years. This is often called the seven year rule, and it is the reason trusts work best as part of planning done well in advance rather than a fix reached for later in life. Continuing to benefit from assets you have technically given away, for example living rent free in a property you have put into trust, can also bring the value straight back into your estate under the gift with reservation of benefit rules, undoing much of the intended planning.

The trust structures most commonly used

A discretionary trust is often chosen where flexibility matters most, since trustees can adapt distributions as a family's circumstances change over time; our guide on how a discretionary trust works sets out how that structure operates day to day. A life interest trust instead gives one named beneficiary, often a surviving spouse, a right to income or to live in a property, with the capital passing to others once that interest ends; see our guide on life interest trusts in your will for more on how that works. Which structure fits depends on your family, the assets involved and how much control you want to keep, and the two are frequently used alongside each other in the same estate plan.

The charges that apply once assets are in a trust

Beyond the entry charge, most trusts face a further inheritance tax charge every ten years, of up to 6% of the value held above the nil rate band at that point, and a similar exit charge, reduced pro rata, if capital leaves the trust between those ten year reviews. These are sometimes called relevant property charges, and they are the reason trusts are not a way of sidestepping inheritance tax entirely, only a way of managing when and how it falls due. Our guide on whether having a trust means you won't need probate or pay inheritance tax goes into this misconception in more detail.

Getting the planning right

Inheritance tax planning with trusts works best when it sits alongside the rest of your estate plan, including your will, any lifetime gifts you have already made and how your pension is set up, rather than as a standalone decision. Our guide on reducing your inheritance tax covers the other options available, from exempt gifts to leaving part of your estate to charity. If you own a business or farmland, it is also worth knowing that since April 2026 the 100% business and agricultural property reliefs have been capped at £2.5 million per person, with relief at 50% above that, which can change whether putting those assets into a trust makes sense. If a trust already forms part of your will, our guide on completing an IHT400 form covers what happens once probate is underway and a trust is involved. Advice early on gives you more options than leaving decisions until later, since much of the benefit of this kind of planning depends on time passing rather than any single document.

Frequently Asked Questions

Do trusts always reduce inheritance tax?

Not automatically. A trust can reduce the inheritance tax eventually due, but this depends on the type of trust used, how much was put in relative to the nil rate band, and whether the settlor survives seven years after making the gift.

What is the seven year rule?

Gifts into most trusts fall outside your estate for inheritance tax purposes once you survive seven years after making them. Dying within that period can bring some or all of the value back into charge, on a reducing scale once you are past three years.

Can I still benefit from assets I have put into a trust?

Generally not without undoing the tax benefit. Continuing to use or benefit from assets you have given away, for example living in a house you have settled into trust, can bring that value back into your estate under the gift with reservation of benefit rules.

How Roche Legal Can Help

If you would like to talk through how a trust could fit your inheritance tax planning, book a discovery call with our trusts and tax team.

Roche Legal is a firm of solicitors in England and Wales, and the information on our website is based on the law here. We regularly advise on estates with assets, beneficiaries or family overseas, so please do get in touch if that's your situation.

Please Note: The nil rate band, taper relief and periodic/exit charge figures in this guide reflect the 2026/27 tax year and were checked against published HMRC and gov.uk guidance at the time of drafting.