How can setting up a trust help to reduce inheritance tax?


A trust is a legal arrangement where money, property or investments are formally transferred to a select group of people (trustees) or a trust company.

When setting up a trust, providing certain conditions are satisfied, you don’t own those assets anymore. They therefore do not count towards your inheritance tax bill when you die.

You can set up a trust immediately, or write it into your will to be established when you die.

How does a trust work?

If set up correctly, then any assets placed into the trust will no longer belong to you, but instead belong to the trust. This is why it should no longer count as part of your estate when you die.

A document, called a trust deed, sets out the rules for how the trust should be operated including who the beneficiaries are, who the trustees are and how the trust should be administered.

The trustees have a very important role as they are the ones who will administer the trust and oversee the assets. The person setting up the trust (known as the settlor) can also be named a trustee.

What type of trust should I set up?

There are many types of trust and you should always seek out the expertise of a specialist solicitor, such as those at GA Solicitors, to determine the most appropriate trust and to also set it up. This is particularly true as many trusts are subject to their own inheritance tax regimes so you will need professional advice to ensure you select the most suitable option.

Some common options are:

  • A bare trust – a simple trust which allows the beneficiary to inherit when they are 18
  • Interest in possession trust – the beneficiary can get income from the trust but does not have a right to the assets which generate the income.
  • Discretionary trust – the trustees have absolute power to decide how the assets are distributed
  • Mixed trust – combines elements from different kinds of trusts
  • Trust for a vulnerable person
  • Non-resident trust – where all trustees are resident outside of the UK

What are the other benefits to having a trust?

Not only can a trust reduce your inheritance tax bill, it also allows you to have control over how your assets are used by future generations.

They can allow you to:

  • Protect your children/grandchildren’s legacy should your surviving spouse remarry
  • Protect your children/grandchildren’s legacy from their own marital disputes
  • Put restrictions in place to safeguard how the assets are spent if the recipients are young or vulnerable.

Are there times when inheritance tax will still need to be paid?

Yes. If you die within seven years of making a transfer into a trust then your estate will have to pay the full inheritance tax (at a rate of 40%).

Be prepared that you will also likely have to pay a 20% tax when setting up the trust.