After the Labour government’s inaugural 2024 Budget closed or restricted other routes to inheritance tax planning, in particular through pensions and AIM shares, trusts are left among the few remaining options.
Trusts have been used for hundreds of years for passing wealth down through families. They can deliver tax advantages. But they also allow the person gifting assets to the trust to retain some control over them.
The variety of types of trusts means that you can tailor succession planning to fit a family’s specific circumstances. An expert advisor like Brown Shipley can make them highly effective tools for passing wealth and assets to future generations in a way that reflects your wishes.
With the threshold for UK inheritance tax frozen at £325,000 since 2009, despite ongoing inflation, trusts were becoming more popular even before the 2024 Budget. The latest data showed families paying the highest ever level of inheritance tax, at £7.5 billion in 2023/24, up from just over £2 billion in 2001/20021. The recent Budget’s inheritance tax squeeze will raise a further £40bn from people’s estates over the next 20 years, according to one actuary’s estimate2.
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Understanding trusts in the UK : a tool for tax efficiency and control
Broadly speaking, there are two main types of trust used in the UK – the discretionary trust and the bare trust. Both have their own advantages that may make one more suitable for your purposes, as settlor, than the other.
What's a discretionary trust ?
Discretionary trusts are a widely used option for long-term family succession planning, offering flexibility in asset distribution. As the name suggests, this type of trust is highly flexible. The trustees, who you nominate, decide how to invest the money in the trust, as well as when to pay out the income or the capital. In addition to its flexibility, the trust has the advantage of keeping control over the wealth or assets held. Are you worried about your child’s marriage or business failing? If so, a discretionary trust can help with asset protection.
There is no tax to pay on establishing the trust, providing the value of your gift does not exceed your available inheritance tax nil rate band.
What's a bare trust ?
A bare trust, also known as an absolute trust, is a simple form of trust that grandparents often use for giving assets to grandchildren. There is no limit how much can be transferred into a Bare Trust and there is no constraint as far as the £325,000 nil rate band is concerned.
Setting up bare trusts for grandchildren is tax efficient because any bare trust income or capital gains are taxed on the child. The child has their own personal allowance, income tax bands, dividend allowance and capital gains tax allowance. For example if the child received less income from the bare trust than the personal allowance threshold of £12,570 (for the 2024/25 tax year), then there is no tax to pay.
The income from a bare trust can be used for a grandchild’s education and maintenance. It’s an effective way of paying for school fees. Notably, however, if the bare trust is established for your children and not your grandchildren, they do not have the same tax breaks.
A potential drawback with bare trusts is that beneficiaries can access the assets at age 18. In our experience, when coupled with some financial education and understanding of the wider family affairs they tend to behave responsibly and leave it invested or put it to sensible use such as a deposit for first property.
Can trusts reduce or mitigate inheritance tax ?
While trusts do not provide automatic tax benefits, they can be useful for inheritance tax planning. Placing assets into a trust can remove them from the settlor’s estate, starting the seven-year clock for IHT purposes, provided certain conditions are met.
At the time of writing, anyone can gift up to £325,000, their nil rate band, to a discretionary trust and not pay any inheritance tax providing the donor then lives for seven years or more. The advantage of making this gift in a trust is that the trustees maintain control of the asset.
In practical terms, a husband and wife could put up to £325,000 each – a total of £650,000 – into a trust and do so every seven years. It’s easy to see how a substantial amount could be placed in trust over time.
Of course, a future Budget could change the size of the nil rate band, or the length of time a person has to live after making a gift for inheritance tax not to be paid.
Tax implications for beneficiaries or trusts in UK
In practical terms, at Brown Shipley we rarely see clients paying more than their £325,000 nil rate band into a trust. That means there are no tax implications, providing the person making the gift, or settlor, lives for the required seven years.
Take a husband and wife in their sixties who would like to start planning for their two children and three grandchildren. Pooling their two £325,000 nil rate bands adds up to £650,000. They might, therefore, put £500,000 into a discretionary trust, making the beneficiaries their two children. Additionally, they could put a further £150,000 into a bare trust, making the three grandchildren the beneficiaries and the money could help pay school fees.
After seven years, the husband and wife’s nil rate band would start again. They could then gift a further £650,000 into trust.
Should a person pay more than £325,000 into a discretionary trust, then inheritance tax will be paid at a rate of 20% (half the normal 40% rate).
How specialist trusts can be tailored to your needs
Specialist trusts can be used to suit your specific needs, providing experts such as Brown Shipley with more tools for calibrating tailored succession plans.
Loan trusts
In the case of a loan trust, a person lends money to a trust that then accumulates any interest or investment gains. For instance, you could lend £1,000,000 to a trust, the income and gains on which would then be immediately outside your estate for IHT purposes. You, as the settlor, could choose whether to be repaid in the future, or to waive some or all of the loan to the trust.
Typically, a loan trust might suit a younger person who is not yet ready to give money away but wants to freeze their inheritance tax position.
Discounted gift trusts
A discounted gift trust allows you to give assets to a trust but reserve the right to receive an income from the trust until your death.
For instance, if you gifted £600,000, and reserved the right to receive £30,000 a year in income depending on your age and your life-expectancy, the value of the net gift might fall within your nil rate band of £325,000. It would not be liable to tax. The precise value of the discounted gift, after you had received your income, would be subject to an actuarial calculation.
Practical considerations of trusts for inheritance tax planning
When it comes to the practicalities of trusts, selecting the right trustees is a key consideration as they ultimately have discretion over what happens to the trust assets and the income. Many people choose a sibling or spouse or indeed a professional trustee company can be appointed.
A trustee’s responsibility should not be taken lightly. They have to decide when the trust should make distributions and to which beneficiaries and making sure that trusts are registered with the Trust Registration Service as appropriate. What’s more, if the trust needs to file tax returns with HMRC the trustees are responsible. At Brown Shipley our experts will help and advise you accordingly, especially if you need to seek legal advice.
Expert advice on setting up a trust that suits your circumstances
Recent changes to UK inheritance tax rules for pensions and AIM shares show the importance of using a diverse range of tools for estate planning. Trusts may well be a suitable option for you and your family.
At Brown Shipley, we can provide you with expert advice about trusts and the potential advantages considering your specific circumstances.
Want tailored advice on passing wealth? Contact our experts today for personalised guidance.
[1] Source: HMRC. https://www.gov.uk/government/statistics/inheritance-tax-liabilities-statistics/inheritance-tax-liabilities-statistics-commentary
[2] UK pensions tax changes to bring in ‘more than £40bn’ before 2045. Financial Times, February 1, 2025. Citing Lane Clark & Peacock. https://www.ft.com/content/6608ece0-7522-4f36-b1f0-d1ff66c269c3
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