With tax thresholds frozen and house prices soaring finances are coming under increased pressure
Trusts are a good way to avoid paying inheritance tax(Image: Getty Images)
More families are being dragged into paying inheritance tax — and many are fighting back by using a quick and easy legal trick that could save their loved ones thousands. With tax thresholds frozen and house prices soaring, setting up a trust is fast becoming the go-to way to keep more of your hard-earned cash out of the taxman’s hands.
Figures show a growing number of people are taking action. Around 121,000 trusts were registered in the 2024-25 tax year, up from 115,000 the year before, bringing the total number of trusts in the UK to at least 825,000, according to official HMRC data.
Trusts can offer potential inheritance tax savings, which is becoming increasingly important as more estates fall into the tax net. The inheritance tax band has been frozen at £325,000 since 2009, and is set to remain at that level until at least 2030.
If the threshold had risen with inflation, however, it would now sit at around £500,000, meaning far fewer families would face a bill. Instead, rising property prices and growing asset values have pushed people over the limit.
Inheritance tax is usually charged at 40% on estates above the threshold, though this could fall to 36% if at least 10% is left to charity. The Treasury expects inheritance tax receipts to hit £14.5 billion a year by 2030-31.
How a trust helps avoid inheritance tax
A trust is a legal arrangement where assets are placed under the control of trustees for the benefit of chosen beneficiaries. These assets can include cash, property, shares, land, and even valuables like jewellery and artwork.
It involves three key roles: the settlor, who puts assets in the trust; the trustee, who manages them; and the beneficiary, who ultimately benefits from the trust.
The biggest inheritance tax advantages comes from a simple seven-year rule. According to the government, if the person setting up the trust lives for at least seven years after transferring the assets into a trust, those assets will usually fall outside their estate — meaning no inheritance tax is due on them.
“When assets are transferred into certain types of trusts, they are typically considered outside the settlor’s estate for inheritance tax purposes,” explains Laura Whetstone, Wealth Advisor at DS Burge & Co. “This reduction in the estate’s value can significantly lower the inheritance tax liability, especially for estates that exceed the threshold.”
But that doesn’t mean you avoid tax all together, however. If assets worth more than £325,000 are placed into certain types of trusts, an upfront 20% inheritance tax charge may apply, with further charges possible every 10 years, and when assets leave the trust.
How to set up a trust
There are several types of trusts in the UK, each with different rules and purposes. Decide on which you prefer.
- Bare trust: Assets are held for a beneficiary who can access them once they turn 18 (or 16 in Scotland)
- Interest in possession trust: The beneficiary receives income from the trust, but the capital passes to others later
- Discretionary trust: Trustees decide who benefits and when
- Life insurance trust: Commonly used to exclude a life insurance payout from your estate for inheritance tax purposes
- Trusts for minors or vulnerable people: Protect money for children or those unable to manage finances themselves
After choosing what assets to put in the trust, you must appoint trustees who are responsible for managing it. You can choose family members, appoint professional trustees such as solicitors or accounts, or have a mix of both.
You then draft a trust deed — a legal document that explains the purpose of the trust, names the trustees and beneficiaries, and sets rules for the management and distribution of assets. Now, it’s time to register it with HM Revenue & Customs (HMRC) on the Trust Registration Service (TRS).
This is mandatory if the trust has taxable income, capital gains, or assets above £100. You will receive a unique trust registration number to use for tax returns.
Make sure to keep records and file taxes as HMRC can charge penalties for non-compliance. Plus, don’t shy away from getting professional advice, as setting up a trust is a complex task.
“Trusts are valuable in inheritance tax planning, offering flexibility and opportunities for potential inheritance tax savings,” reads the DS Burge & Co website. “They allow individuals to manage their assets during their lifetime and ensure a smooth transfer of wealth to their beneficiaries after death. However, trusts are not universally applicable; each individual’s financial situation and goals are unique.
“Therefore, careful consideration must be given to the type of trust that best meets your needs, the responsibilities of the appointed trustees, and the potential tax implications involved.”
