In God We Trust 🙏
The Truth About Trusts, Inheritance Tax and Family Wealth
“Just put it in a trust.”
If inheritance tax planning were that simple, nobody would pay inheritance tax.
Yet thousands of families do every year.
Trusts can be incredibly useful.
But they are also one of the most misunderstood tools in financial planning.
Many people assume trusts exist purely to avoid inheritance tax.
In reality, trusts are often more about:
control,
protection,
flexibility,
and family wealth planning.
Tax can be part of the story.
But it is rarely the whole story.
First, How Does Inheritance Tax Actually Work? 💷
Before discussing trusts, we need to understand the rules.
Currently, most estates benefit from:
Nil Rate Band
£325,000 per person.
Residence Nil Rate Band
Up to £175,000 per person when passing a qualifying property to direct descendants.
Together, this means many individuals can potentially pass on:
£500,000 tax-free.
For married couples and civil partners, unused allowances can generally be transferred.
This means a couple may potentially pass on:
Up to £1 million before inheritance tax becomes payable.
Anything above the available allowances may be taxed at 40%.
For many families, particularly those who own property and have accumulated pensions and investments, crossing the £1 million threshold is becoming increasingly common.
What Is A Trust? 🏛️
At its simplest, a trust is a legal arrangement.
There are three key parties:
Settlor
The person placing assets into the trust.
Trustee
The person responsible for managing those assets.
Beneficiary
The person who ultimately benefits from those assets.
Think of it like a family vault.
You place assets into it.
The trustees look after it.
The beneficiaries eventually benefit from it.
Why Do People Use Trusts? 🤔
Contrary to popular belief, inheritance tax is not usually the primary reason.
Trusts are often used for:
Control 🎯
You decide:
who receives assets,
when they receive them,
and under what circumstances.
Protection 🛡️
Trusts can help protect family wealth against:
divorce,
bankruptcy,
poor financial decisions,
and vulnerable beneficiaries.
Family Wealth Planning 👨👩👧👦
Helping children and grandchildren in a structured way.
Tax Planning 💷
Sometimes.
But not always.
And certainly not automatically.
The Main Types of Trusts
Bare Trust 👶
The simplest trust.
Imagine grandparents place £50,000 into a Bare Trust for a newborn grandchild.
The trustees manage the money.
But the money ultimately belongs to the grandchild.
Once they reach adulthood, they become entitled to the assets.
Pros
Simple
Tax efficient
Low administration
Cons
Limited flexibility
Beneficiary eventually gains full control
Discretionary Trust 🎯
This is often the trust people have in mind when discussing family wealth planning.
The trustees decide:
who receives money,
when they receive it,
and how much they receive.
Imagine parents leave £600,000 in trust for three children.
One child becomes financially successful.
One starts a business.
One faces health challenges.
Rather than automatically splitting the money equally, the trustees can make decisions based on each beneficiary’s circumstances and the guidance left by the parents.
For example, the parents may leave a Letter of Wishes expressing how they would like the trustees to use the trust.
They might suggest that money should be used for:
education,
house deposits,
business opportunities,
or supporting vulnerable family members.
The trustees are not legally bound by these wishes, but they are usually an important guide when making decisions.
This flexibility is one of the main reasons discretionary trusts are popular.
Pros
Flexibility
Control over how wealth is distributed
Potential asset protection
Can adapt to changing family circumstances
Cons
More complex
More expensive
Potential inheritance tax charges
These trusts can also be subject to inheritance tax charges while the trust is in existence, including periodic charges every 10 years and charges when assets leave the trust.
There are also specialist trust-based planning solutions, such as Loan Trusts and Discounted Gift Trusts, but for most families the three trust types covered in this article are the most useful starting point.
Interest in Possession Trust 🏠
Often used in second-marriage situations and blended families.
Imagine John dies.
His wife Sarah receives income from trust assets or the right to continue living in a property during her lifetime.
When Sarah dies, the capital passes to John’s children from his first marriage.
This allows one person to benefit from the assets while preserving the underlying wealth for someone else.
These trusts are commonly used when families want to:
provide for a surviving spouse,
protect assets for children,
preserve family wealth across generations,
and avoid unintended consequences if circumstances change in the future.
This is one reason trusts are often more about control than tax.
The Downsides Of Trusts ⚠️
Trusts aren’t free.
A straightforward trust drafted by a solicitor may cost:
£1,000–£3,000+
More complex planning can easily exceed:
£5,000–£10,000+
depending on the structure and advice required.
There may also be ongoing costs for:
trustee administration,
tax returns,
investment management,
professional trustees,
and legal reviews.
There is another trade-off many people overlook.
One of the features of a trust is that legal ownership is separated from beneficial enjoyment.
While you may still be involved as a trustee and influence decisions, the assets no longer belong to you in the same way as before.
That is often the price paid for obtaining the protections and planning advantages a trust can provide.
The Biggest Myth About Trusts ❌
Many people believe:
Assets placed into trust automatically avoid inheritance tax.
This is simply not true.
Some trusts can trigger inheritance tax charges immediately.
Others may still be caught by inheritance tax rules.
And if you continue benefiting from an asset after gifting it, HMRC may still treat it as part of your estate.
Which brings us to a better question.
So What Actually Works? 💡
Inheritance tax planning is usually about combining several strategies rather than relying on one.
1. Use Your Annual Gifting Allowances 🎁
Each individual can gift:
£3,000 per tax year.
Unused allowances can normally be carried forward one year.
A couple could potentially gift:
£12,000 in the first year.
2. Small Gifts Exemption 🎁
You can gift:
£250 per person
to multiple individuals each year.
Useful for grandchildren and wider family members.
3. Wedding Gifts 💒
You can gift:
£5,000 to a child
£2,500 to a grandchild
£1,000 to anyone else
upon marriage.
4. Gifts Out Of Surplus Income 💷
One of the most underused exemptions available.
Imagine your pension and investment income generates:
£80,000 per year
But you only spend:
£55,000.
The remaining £25,000 could potentially be gifted each year and fall immediately outside your estate if structured correctly.
This can be incredibly powerful.
5. The Seven-Year Rule 📅
Many lifetime gifts are known as Potentially Exempt Transfers (PETs).
If you survive seven years after making the gift, it generally falls outside your estate for inheritance tax purposes.
For example:
Gift your daughter:
£200,000
Survive seven years.
Potential inheritance tax saving:
£80,000
If you die within seven years, some or all of the gift may still be taken into account when calculating inheritance tax.
Taper relief can reduce the tax payable after three years, but full exemption is only achieved after seven years.
6. Make Use Of Spousal Exemptions ❤️
Assets passing between spouses are generally exempt from inheritance tax.
7. Consider Trusts Where Appropriate 🏛️
Trusts can help.
But they are usually one part of a wider estate plan rather than the entire solution.
A Real Family Example 👨👩👧👦
Imagine a married couple with:
🏠 Family home: £800,000
📈 Investments: £400,000
💷 Cash & Savings: £150,000
🎯 Pension assets: £350,000
Total wealth:
£1.7 million
Potential available allowances:
£1 million
Taxable estate:
£700,000
Potential inheritance tax liability:
£280,000
This is where planning starts to matter.
Not necessarily because of trusts.
But because of:
gifting,
allowances,
pension planning,
and family wealth transfer strategies.
Doing nothing is also a decision.
Don’t Wait Until You Die ❤️
This is perhaps the most important point in the entire article.
Many parents want to leave wealth behind.
But sometimes the biggest impact comes from helping while you’re still alive.
Helping with:
🏠 A house deposit
🎓 Education costs
👶 Childcare
📈 Starting a business
can often transform a child’s life.
And you get to see the benefit.
Personally, I think more families should have this conversation.
If you’re fortunate enough to help your children or grandchildren today, there can be enormous value in doing so.
Not just financially.
But emotionally too.
Many people inherit wealth in their 50s or 60s.
By then, the moment when that money would have had the greatest impact may have already passed.
There is something powerful about seeing your children and grandchildren benefit from your hard work while you’re still here to witness it.
The Pension Rule Change Everyone Should Know 🚨
Historically, pensions have often been viewed as one of the most tax-efficient assets to pass on.
Many advisers would encourage retirees to spend:
ISAs first
taxable investments second
while leaving pensions untouched.
However, current government proposals indicate that unused pension funds may increasingly be brought into inheritance tax calculations in future.
If implemented as proposed, this could significantly change how many families approach estate planning.
Strategies that previously relied on preserving pension wealth for future generations may need to be revisited.
For some families, it may now make more sense to:
spend pension assets during retirement,
gift wealth earlier,
and reduce future inheritance tax exposure.
This is one of the biggest estate-planning conversations taking place today.
Final Thoughts 🙏
One of the biggest lessons I’ve learned from speaking to families is that wealth is often most valuable when it arrives at the right time.
A house deposit at 30.
Help with childcare at 35.
Funding education at 20.
Support during a difficult season of life.
For many families, those moments create more impact than a larger inheritance received decades later.
Trusts, gifting strategies and inheritance tax planning are ultimately just tools.
The real question is:
How do you want your wealth to improve the lives of the people you care about?
Start there.
The planning follows.
