Overview
Trusts can play an important role in estate planning. They can help reduce inheritance tax while allowing greater control over family wealth. About 121,000 trusts were created in the 2024/25 tax year, compared with 115,000 the year before. From April 2027, unused pension savings will form part of estates for inheritance tax purposes.
Trusts are now widely used in the UK. Many people expect higher inheritance tax bills in the future. Planned changes to the treatment of pensions make estate planning more pressing. Trusts offer one possible response to these challenges.
Why inheritance tax planning matters more than ever
Benjamin Franklin once said that death and taxes are unavoidable. That statement still resonates today.
Tax pressures in the UK have increased steadily. Capital gains tax and corporation tax have risen in recent years. Income tax thresholds have also remained frozen. This has drawn more people into higher tax bands.
Inheritance tax adds another layer of concern. The nil-rate band has stayed at £325,000 since 2009. It will remain at that level until at least 2031. If it had followed inflation, it would now stand near £525,000.
From April 2027, unused pension assets will be included in estates. This change will increase estate values for many families. Some estates may then exceed the inheritance tax threshold. Amounts above the threshold can face a 40% tax charge.
These pressures explain growing interest in trusts. HM Revenue & Customs reports around 121,000 trusts were set up in 2024/25. That figure rose from 115,000 in the previous tax year.
How trusts support inheritance tax planning
Inheritance tax applies to the value of your estate when you die. One clear way to reduce inheritance tax is to give assets away during your lifetime. If you survive for seven years after making a gift, it usually falls outside your estate.
Outright gifts create their own risks. Once you give assets away, you lose control over them. This can cause problems later.
An adult child may divorce. The gifted assets could become part of a settlement. Creditors could also make claims. In some cases, money may simply be spent too quickly.
Trusts offer a more measured approach. They allow you to pass on wealth while retaining structure and oversight. For many families, this balance is appealing.
Why discretionary trusts offer flexibility
A discretionary trust places assets under the control of trustees. You choose the trustees when setting up the trust. They decide who benefits, how much is paid, and when payments occur.
You can also write a letter of wishes. This document guides trustees on your intentions. You can update it as circumstances change.
Marcia Banner, tax and trusts specialist at St. James’s Place, explains why discretionary trusts remain popular. She says they combine flexibility with possible inheritance tax benefits. Trustees act as custodians and respond to changing family needs.
A trust can also hold practical assets. For example, the trust may buy a property for a beneficiary to use. Because the trust owns the property, it often offers stronger protection.
Using trusts to support family wealth over time
Trusts can help with long-term family planning. Some parents worry about increasing their children’s estates. An outright inheritance could raise future inheritance tax risks.
Assets held in a discretionary trust can stay outside beneficiaries’ estates. At the same time, trustees can still make funds available. This structure can help reduce inheritance tax across generations.
HMRC recognises this advantage. For that reason, it applies specific charges to certain trusts. Discretionary trusts are most affected by these rules.
Understanding inheritance tax charges on trusts
Discretionary trusts face inheritance tax charges every ten years. Each trust benefits from its own nil-rate band of £325,000.
If the trust exceeds that value at a ten-year anniversary, a charge may apply. The maximum rate is 6 percent on the excess.
Consider this example. You place £300,000 into a discretionary trust. No immediate inheritance tax arises. After ten years, the trust grows to £400,000. The £75,000 above the threshold may face a 6 percent charge.
Even with these charges, trusts can still help reduce inheritance tax. The alternative may involve a 40 percent charge when assets pass on death. The right choice depends on wider planning needs.
Can trusts allow access while reducing inheritance tax?
Many people ask if they can reduce inheritance tax and still access their money. In some cases, trusts can help. The rules, however, are strict.
If you continue to benefit from gifted assets, problems can arise. HMRC may treat the arrangement as a gift with reservation. In that case, the assets remain within your estate.
One option sometimes discussed is a discounted gift trust. This approach allows regular withdrawals while passing value to beneficiaries. It may help reduce inheritance tax in certain situations. Specialist advice is essential due to its complexity.
Taking advice before setting up a trust
Trusts can offer powerful planning opportunities. They are not simple arrangements. Many cannot be undone once established.
Professional advice helps ensure a trust meets your aims. It should reflect your family needs, tax position, and long-term plans. When used correctly, a trust can help reduce inheritance tax without sacrificing control. Get in touch today to find out how we can help.
The value of an investment with St. James’s Place depends on fund performance and may fall as well as rise. You may get back less than invested. Tax rules and reliefs can change, and outcomes depend on personal circumstances. If withdrawals exceed bond growth, capital will be eroded. Trusts are not regulated by the Financial Conduct Authority.
Source
Statistics on trusts in the UK – HM Revenue & Customs, 18 December 2025