Trusts and Inheritance Tax

Trusts are sometimes used to reduce the value of an estate for the purposes of mitigating Inheritance Tax.

When you die, your estate (the total value of money, shares, trusts, property, and any other assets less any debts you leave behind) may be subject to Inheritance Tax of 40% (36% if 10% of estate is left to charity) on the value that's over the nil-rate threshold of £325,000.

Fortunately, there are ways to legally reduce the impact of inheritance tax on your estate, including using trusts to transfer your taxable assets out of your possession into trust for the (eventual) benefit of a loved one, a group of loved ones, an institution you have an affinity with or a charity that you care about.

How can I use trusts to reduce my Inheritance Tax bill?

Putting assets into a trust means that they no longer belong to you, so they won't usually be counted as part of your estate when you die if the gift was made more than seven years before. Using trusts in this way to reduce the value of your estate before you die will mean that your Inheritance Tax bill is also reduced.

Some assets held in trust are unconditionally exempt from IHT, such as property held abroad that is owned by the trustees and settled by someone who was permanently living outside the UK at the time of making the settlement. The rules regarding excluded property are very complex. Certain types of trust may also be exempt; for example if you place assets into trust for the beneficiary who is a bereaved minor.

Situations where using trusts do not reduce Inheritance Tax

  • Some inheritance tax may be payable when you transfer the assets into a trust that totals more than £325,000. If the tax is paid by the trustees during the settlor's lifetime, this tax is reduced to 20%.
  • If the settlor (or donor – see what is a trust) dies within seven years of making a transfer into a trust, and the total value of all transfers and gifts made in that period exceeds the nil-rate threshold; IHT may be payable up to 40%, as with other assets. For this reason, it is important to start planning ahead as early as you can.
  • Assets held in a trust such as money, shares, or property can also incur complicated ongoing Inheritance Tax liabilities. The main situations when Inheritance Tax is due are: when assets are transferred into a trust; when a trust reaches a 10-year anniversary of when it was set up (there are 10-yearly Inheritance Tax charges); when assets are transferred out of a trust (known as ‘exit charges’) or the trust ends; when someone dies and a trust is involved when sorting out their estate.

Next steps

If you think that your estate will be worth more than the £325,000 IHT threshold when you die, you should start planning ahead as soon as possible. The rules around inheritance tax and trusts are complicated, and the right option for you will depend on your individual circumstances.

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Last updated: 01 July 2016