Tens of thousands of families are setting up trusts to avoid inheritance tax ahead of reforms being brought in by the chancellor.

About 121,000 trusts were registered in the UK in the 2024-25 tax year, up from 115,000 the year before. It means there are now 835,000 trusts, with one in seven set up last year, according to HM Revenue & Customs.

Experts said it was because more families will be dragged into paying inheritance tax because the allowance that you can pass on tax-free has been fixed at £325,000 since 2009 and will remain frozen until at least 2030. If it had risen with inflation it would be almost £525,000 now.

Changes to inheritance tax relief on businesses and farms, which will come into effect in April, have also boosted interest in trusts — with many of the advantages of using a trust set to disappear in the new tax year.

How much you can give away tax-free

As well as the £325,000 nil-rate band there is an extra allowance for those passing on their main home to a direct descendant, called the residence nil-rate band. It was introduced in 2017 at £100,000, but has been frozen at £175,000 since 2021.

Anything left to a spouse or civil partner is free from inheritance tax and they can also inherit each other’s allowances, meaning a couple can pass on up to £1 million inheritance tax-free if their estate is worth less than £2 million and includes their main home. Inheritance tax is charged at 40 per cent.

Large gifts of any amount can be made tax-free if you live for at least seven years after making them — here’s our guide to the seven-year inheritance tax rule.

How trusts work

A trust is a legal arrangement that you can use to give away assets indirectly. It gives you more control over who gets the assets and when they get them, compared with simply handing over a gift in a will.

They can also be used as a way of reducing your inheritance tax bill because the assets can fall outside your estate, with different kinds of trusts usually having their own inheritance tax rules.

Assets placed in a discretionary trust, for example, can fall immediately out of your estate. However, the taxman counters this benefit by charging a reduced inheritance tax at 20 per cent on any assets placed in the trust above the £325,000 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.

• Can a trust reduce inheritance tax?

Marc Acheson from Utmost Wealth Solutions, which analysed the HMRC data, said: “The continued growth in trust registrations is entirely understandable.

“With the inheritance tax nil-rate band frozen for more than 15 years and the tax base being widened through successive policy changes, more families are finding themselves exposed to inheritance tax and are turning to trusts as a well-established way of organising succession and mitigating long-term liabilities.”

There is no minimum amount you can put into a trust, but they come with their own set-up and running costs. The fee to set up a trust could be upwards of £1,000, while professional trustees can also charge a fee to manage the trust, which is usually a percentage of the trust’s assets. This means it is important to make sure the tax savings outweigh the charges.

Farms rushing to beat April deadline

Chris Etherington, from the accountancy firm RSM, said businesses and farms had driven interest in trusts.

In her first budget in October 2024, Rachel Reeves announced the 100 per cent inheritance tax relief for business and agricultural property would be capped at £1 million from April this year. In December, it was announced that this threshold will be raised to £2.5 million. Above this rate they will pay an inheritance tax rate of 20 per cent.

• Why giving your home to family might backfire

This will also apply to trusts, meaning that from April, those placing assets that qualify for business and property relief worth more than £2.5 million into a trust could face an upfront fee of 20 per cent on the value above that amount — the same rate they would pay if it was held out of a trust.

At present no upfront fee is applied to assets that qualify for business or agricultural relief, regardless of value.

Etherington said: “We’re seeing a lot more people looking to put shares of family business and agricultural land into trusts to take advantage before the changes.”