Inheritance tax is becoming a problem for more families every year.
Frozen thresholds, inflation and the price of a family home have combined to push many families past the £325,000 barrier, and into paying 40% on money that they have been bequeathed. There are ways to avoid this harsh tax, and one of the simplest used to be to put all your spare wealth into your pension.
Unused pension funds could be passed on to your loved ones intact, as they were considered outside your estate.
The government, desperate to replenish their coffers, has removed this concession, and from April 2027, pension funds will be counted as part of your estate, and taxed accordingly.
This sad development has left many people to look at trusts as a way of protecting their wealth for the next generation, however, putting property or other assets in a trust may not always protect you from the taxman. There can be pitfalls if you try to set up a trust to avoid tax without expert advice.
At Continuum we are asking – can you trust a trust?
What exactly is a trust?
A trust is a legal arrangement where one party, the benefactor, transfers assets—like money, property, or investments—to another party (the trustee) to manage for the benefit of a third party, the beneficiary.
There are two common types of trust: bare and discretionary. Bare trusts are often used to give assets to a child or grandchild. The trustee looks after the asset on behalf of the beneficiary, who gets full control of it once they turn 18 (or 16 in Scotland).
The benefactor cannot change their mind about giving the asset away or who gets it once the trust has been established, if it is an irrevocable trust
Benefactors who want to maintain control over the asset can choose a discretionary trust. They do not need to specify a beneficiary when creating the trust and the trustees can decide how to allocate the assets.
A benefactor can also be a trustee, and professional trustees are not essential. Relatives or a family friend can usually act.
The tax advantage of a trust
Trusts could also help to reduce any inheritance tax due on an estate. If correctly placed in a trust, assets no longer belong to a benefactor and so are not part of the estate that will be subject to inheritance tax when they die.
However, trusts can be subject to income tax, capital gains tax, and inheritance tax depending on their structure and purpose. Some trusts, like ‘settlor-interested’ trusts, have special and complicated tax rules.
However, if properly used, they can help to bring the value of an estate below crucial inheritance tax thresholds, provide security for family members and help with estate planning, particularly for families with complicated affairs.
What can go wrong with a trust?
But trusts are not foolproof. They can potentially backfire and lead to a surprise tax bill, and the rules are incredibly complex.
For assets to be considered by HM Revenue & Customs as being outside a donor’s estate for inheritance tax purposes, the donor cannot get any benefit from them once they have been given away. For example, you cannot transfer your home into a trust and continue to live there rent-free or earn rent from it. This would be seen as a “gift with reservation” by the taxman, which would negate the benefits of putting it into trust, and mean it would be included in your estate for inheritance tax when you die.
There can be problems with Capital Gains Tax with a Trust that is not carefully set up, which can actually increase your tax bill as assets outside of a trust do not trigger CGT because their value is reset at the market rate when you die.
So, should you use a trust?
There is no minimum amount you can put into a trust, but they come with their own set-up and running costs, so it is important to make sure the tax savings outweigh the charges.
To see if a trust could be a worthwhile way to help your family mitigate Inheritance tax, expert advice is essential.
Call us at Continuum for the advice you need. We can look at what a trust could do for you, and at other solutions to help you avoid death duty costs.
Inheritance tax: thresholds for 2025/26 – MoneySavingExpert
Trusts and taxes: Types of trust – GOV.UK
The information contained in this article is based on the opinion of Continuum and does not constitute advice on a suitable taxation strategy or investment strategy, you should seek independent financial advice before embarking on any course of action.
The value and returns of an investment are not guaranteed, investors may lose some or all of their investment. When investing Capital is at risk.
Levels and basis of reliefs from taxation are subject to change and their value depends upon your personal circumstances. We recommend that the investor seeks professional advice on personal taxation matters.
We recommend that you seek professional advice on personal taxation matters.
The Financial Conduct Authority does not regulate taxation and trust advice or will writing.
