The world of trusts and solicitors might seem like the preserve of the super-rich but a growing number of ordinary families are using them to shield their assets from the taxman.
In Rachel Reeves’s first budget in October last year, the chancellor overturned the inheritance tax rulebook. From April 2026, farmers and family businesses will be landed with larger bills and, from April 2027, pensions will be included in your estate for tax purposes.
This has led lawyers to report a surge in clients looking to set up trusts as a way to mitigate the tax bill they leave their family when they die. When used correctly, trusts can help you to lower or completely avoid inheritance tax — but they are not foolproof. Here’s what you need to know.
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What is a trust?
A trust is a legal arrangement that you can use to give away assets (and sometimes move them outside your estate for inheritance tax purposes) indirectly. It gives you more control over who gets the assets and when they get them, compared with simply handing over a gift.
According to the Trust Registration Service, an official record of most trusts in the UK, there were 733,000 active trusts and estates listed in August 2024, up from 633,000 the year before.
Each trust will have a beneficiary or beneficiaries and be managed by a third party, known as a trustee. In some cases, the donor can be a trustee. There are two main types of trust: bare and discretionary.
How do bare trusts work?
Bare trusts are typically used to give away assets to a child or grandchild. The trustee looks after the asset on their behalf and they get full control once they turn 18 (16 in Scotland).
If you live for seven years after making a gift of money into the trust, then it should be free from inheritance tax. Bare trusts are ideal if you want to start the clock on the seven-year time limit without giving your beneficiaries immediate access to the money. They are easier to set up than other trusts and can be opened with small sums.
Another benefit is that while the beneficiary cannot get at the money until they are 18, the trustees can use the assets before then on their behalf if it is for their benefit. For example, a parent who was a trustee could use the assets to pay for the school fees of the child who was a beneficiary.
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The downside to bare trusts is that they are the least flexible type of trust. You cannot change your mind about giving the asset away or who gets the asset once the trust has been established, and you cannot control how the money is used. They are also simple, so are unlikely to be appropriate for more complex situations.
How do discretionary trusts work?
Discretionary trusts are more complicated — and typically more costly to create — but give you more control and flexibility over how you give away your assets.
You don’t need to name all the beneficiaries immediately, so you could include future grandchildren when you set it up. You can also be a trustee, and trustees will decide how the money within a discretionary trust is allocated.
Discretionary trusts also provide greater asset protection. Adjustments can be made if family circumstances change and, because the assets are seen as separate from the beneficiaries’ personal assets, they cannot be touched in the case of a divorce or other legal dispute.
The downsides are that there is a lack of certainty for the beneficiaries, the trusts can be costly and complicated to set up (it is recommended to get legal advice) and there will be ongoing administration, tax and compliance requirements — and the costs that come with it.
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They are also more complicated than bare trusts when it comes to inheritance tax. Assets in a discretionary trust are not considered as part of anyone’s estate for 125 years, so are in effect free from what is not very fondly known as the “death tax”.
However, the taxman counters this considerable benefit by immediately charging inheritance tax at 20 per cent on any assets put into a discretionary trust above the £325,000 tax-free allowance. A further charge of up to 6 per cent is levied every ten years on the value of everything in the trust above the allowance.
The allowance (which is double for a couple) effectively resets every seven years, so you can put £325,000 — or £650,000 for a couple — into a trust every seven years without incurring a tax bill.
When is a gift not a gift?
The normal gift rules still apply to the assets and money that are put into trusts. This means that you cannot continue to benefit from anything that you move into trust for inheritance tax purposes and still expect to lower your tax bill.
For example, you cannot put a home into a trust and continue living in it rent-free, or earn rent from it. This would be called a “gift with reservation” and if HMRC suspects this has been the case it could levy IHT on the asset even if the donor survived the full seven years after giving it away.
How much do trusts cost?
Trusts aren’t free, so it is important to do the sums to see whether the tax savings outweigh the charges. Initial fees for setting up a trust range from £5,000 to £12,000, depending on complexity, and ongoing advice is likely to cost between £500 and £800 a year.
If you do not appoint yourself or family members as the trustees, expect to pay another £4,000 a year for professional trustees.