Leveraging Trusts for effective Inheritance Tax planning

Inheritance Tax is the tax imposed on the value of your estate (assets, possessions, property) which is transferred to your beneficiaries after death. If not adequately prepared for, this could mean you leave behind a financial burden. However, with careful planning, you can reduce or even eliminate this tax liability. One powerful tool in this endeavour are Trusts.

How can Trusts aid with Inheritance Tax planning and help you to secure your beneficiaries’ financial future?

Understanding Inheritance Tax

Before diving into the benefits of Trusts, let’s take a closer look at Inheritance Tax. In the UK, estate taxes are levied on the total value of an individual’s estate above a certain threshold. The tax rate is currently 40% on estates with a value more than £325,000. There is a further relief of £175,000 for individuals who leave their own home to their direct descendants, but certain conditions need to be met.

How Trusts Can Help

Asset Protection

One of the primary benefits of Trusts is their ability to protect your assets. By transferring assets into a Trust, you effectively remove them from your taxable estate. These assets are no longer considered part of your estate, reducing the value subject to Inheritance Tax.

Gifting Strategy

Trusts allow you to gift assets to your beneficiaries gradually over time. This can help you stay below the Inheritance Tax threshold. There are two types of Gift Trusts, Absolute and Discretionary.

An Absolute Trust means the beneficiaries are named on the deed which cannot be changed. With a Discretionary Trust, you choose a class of family instead of names. This could encompass children and grandchildren, for example. There is also room to widen the class to include siblings, cousins, or even non-family members.

Irrevocable Trusts

Irrevocable Trusts, once established, cannot be changed, or revoked without the consent of the beneficiaries. These Trusts are often used to remove assets from your estate entirely, providing a clear strategy for reducing your Inheritance Tax liability.

Life Insurance Trusts

Life insurance policies can be included in Trusts, which can be especially useful for covering the cost of Inheritance Tax. The insurance proceeds can be used to pay the tax bill, ensuring that your beneficiaries receive their inheritance without the burden of a large tax bill.

Charitable Trusts

Charitable Remainder Trusts and Charitable Lead Trusts are two options that allow you to support charitable causes while potentially reducing your estate’s taxable value. You can leave assets to a Charitable Trust, which provides income to your beneficiaries for a certain period, after which the remaining assets go to the charity.


Inheritance Tax planning is a crucial aspect of estate planning, and trusts can be powerful tools to achieve your goals. However, it’s important to consult with legal and financial professionals when setting up Trusts, as the rules and regulations can be complex. With proper planning and the right structures in place, you can minimise the impact of Inheritance Tax, ensuring that your assets are passed on to your loved ones as efficiently as possible.

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Written by Kelly Davies

October 12, 2023

Category: Blog

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