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Can setting up a trust to reduce inheritance tax? Sometimes, yes. Placing assets in the right trust can move them outside your estate so they are not taxed at 40% when you die, and it lets you keep some control over how and when your family benefits. But trusts are not a magic bullet: they carry their own tax charges, the savings usually take seven years to take full effect, and the wrong structure can cost more than it saves. This guide explains, in plain English, when a trust genuinely helps and when it does not.
Key takeaways
- A trust can move assets outside your estate, but usually only fully after seven years.
- Gifts into most trusts above the £325,000 nil-rate band trigger an immediate 20% charge.
- Trusts face a ten-year periodic charge of up to 6%, plus exit charges when assets leave.
- You cannot keep benefiting from what you give away, that is a gift with reservation and it stays in your estate.
- Trusts are complex and the FCA does not regulate them, so advice matters.
How a trust reduces inheritance tax
Inheritance tax is charged at 40% on the value of your estate above your allowances. A trust is a legal arrangement where you (the settlor) hand assets to trustees, who look after them for the people you choose (the beneficiaries). Done correctly, the assets you place in trust are no longer counted as yours, so they fall outside your estate for inheritance tax.
The catch is timing. A gift into trust is usually treated as a potentially exempt or chargeable transfer, and it only falls fully outside your estate once you have survived seven years. Die within that window and some or all of the value is added back into the calculation. This is the same seven-year rule that applies to outright gifts.
The charges trusts carry
This is the part the “avoid inheritance tax with a trust” headlines leave out. Most trusts sit under what is called the relevant property regime, and it brings three potential charges:
| Charge | When it applies | Rate |
|---|---|---|
| Entry charge | On assets you put in above the £325,000 nil-rate band | 20% immediately |
| Ten-year periodic charge | Every 10 years, on trust value above the nil-rate band | Up to 6% |
| Exit charge | When assets leave the trust to a beneficiary | Proportion of up to 6% |
None of this makes trusts a bad idea. It means the benefit comes from removing 40% on your death in exchange for these smaller, periodic charges, which for larger estates can still be a substantial net saving. But it has to be worked out, not assumed.
Common types of trust
- Discretionary trust. The trustees decide which beneficiaries receive what, and when. Flexible, and useful where circumstances may change, but fully within the relevant property regime above.
- Bare trust. The beneficiary is fixed and entitled to the assets at 18. Simpler, and treated as a straightforward gift for inheritance tax, so the seven-year rule applies without the periodic charges.
- Interest in possession trust. One beneficiary has the right to income from the trust, often used to provide for a spouse while preserving capital for children.
- Loan or discounted gift trusts. Specialist arrangements that let you keep some access to your money while still reducing the estate over time.
Which is right depends entirely on your aims, so this is a decision to take with advice rather than from a template.
When a trust is worth considering
- Your estate is comfortably above your allowances and likely to face a 40% bill.
- You want to pass wealth on but keep some control, for example for young children or a vulnerable relative.
- You want to protect assets against future risks such as divorce or care costs.
- You are planning early enough to benefit from the seven-year rule.
When a trust is not the answer
Trusts are oversold. For many families, simpler tools do the job with less cost and complexity: using the spouse exemption, gifting within the annual exemptions, making regular gifts out of surplus income, leaving 10% to charity to cut the rate to 36%, or holding assets that qualify for Business Relief. A trust is one option among several, and often not the first one. We set the full range out in our guide to how much inheritance tax you might pay.
Getting it right
Trusts sit at the meeting point of financial planning, tax and law, and a mistake is expensive and hard to undo. At First Equitable we work out whether a trust genuinely reduces your inheritance tax once all the charges are counted, which type fits your goals, and how it works alongside your pensions, investments and will. Where a trust is the right tool we set it up properly with your legal adviser; where it is not, we tell you so. See our trusts and inheritance tax planning service and our inheritance tax planning advice in Liverpool.
Trusts and inheritance tax FAQs
Can you avoid inheritance tax with a trust?
A trust can reduce inheritance tax by moving assets outside your estate, but not avoid it entirely. Gifts into most trusts above the 325,000 pound nil-rate band face a 20% entry charge, and trusts carry a ten-year periodic charge of up to 6% plus exit charges. The benefit usually takes seven years to take full effect.
How long does a trust take to reduce inheritance tax?
Assets placed in trust generally fall fully outside your estate once you have survived seven years, under the same seven-year rule that applies to gifts. If you die within that period, some or all of the value can be added back.
What are the tax charges on a trust?
Most trusts face up to three charges: a 20% entry charge on value above the nil-rate band, a ten-year periodic charge of up to 6%, and an exit charge when assets leave the trust.
Can I still use assets I put in a trust?
Generally no. If you keep benefiting from what you give away, it is treated as a gift with reservation of benefit and stays inside your estate for inheritance tax. Some specialist trusts allow limited access, which needs careful structuring.
Is a trust the best way to reduce inheritance tax?
Not always. For many people, simpler options such as the spouse exemption, gifting, gifts out of surplus income, charitable giving or Business Relief work with less cost and complexity. A trust is one tool among several and should be chosen with advice.
Talk to us about trusts and IHT
First Equitable is a whole-of-market firm of independent financial advisers with offices in Liverpool and Chester, and our team includes Chartered expertise. We give honest advice on whether a trust genuinely reduces your inheritance tax, and on the simpler options that often work better. The first consultation is free, with no obligation and no minimum contract.
Information correct as at July 2026 and based on the rules for the 2026/27 tax year. Tax rules, allowances and thresholds can change, and the value of any tax relief depends on your individual circumstances. The Financial Conduct Authority does not regulate some forms of estate planning, trusts or tax advice. The value of investments can fall as well as rise and you may get back less than you invested. This article is general information only and does not constitute personal advice. You should seek advice specific to your circumstances before acting.
