Trusts and Inheritance Tax Explained

Trusts and inheritance tax explained for England and Wales

Trusts and inheritance tax interact in several different ways, and the results are not always straightforward. This guide covers the essentials for people in England and Wales who are dealing with probate, writing a will, or thinking about setting up a trust. It explains how different types of trust can affect the tax due on an estate and highlights the situations where specialist advice is worth seeking.

Key inheritance tax thresholds to understand

Before looking at trusts, it helps to understand the basic IHT (inheritance tax) allowances in place for the 2026/27 tax year.

• Nil Rate Band (NRB). Each person has a nil rate band of £325,000. Assets up to this figure pass free of IHT. Anything above is normally taxed at 40 per cent unless an exemption or relief applies. Following the 2025 Autumn Budget, this threshold is frozen until 5 April 2031.
• Residence Nil Rate Band (RNRB). Up to £175,000 of additional allowance per person may be available when a qualifying home passes to direct descendants (children, step-children, adopted children, grandchildren). It tapers by £1 for every £2 that the overall estate exceeds £2 million. This figure is also frozen until 5 April 2031.
• Transferability between spouses or civil partners. Any unused NRB and, where conditions are met, unused RNRB can transfer to a surviving spouse or civil partner. A qualifying couple can therefore pass up to £1 million free of IHT.

These allowances matter when deciding whether to use trusts and how to structure them. Moving value into a trust, whether during your lifetime or on death, affects which allowances are used and when.

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How trusts affect inheritance tax

Putting assets into trust changes who is treated as owning them for IHT purposes. Once assets are fully transferred to most types of trust, they are no longer part of the original owner’s estate. However, this does not mean there is no tax to pay. Immediate charges, later charges, or both may arise depending on the trust type.

The timing, the type of trust, and who can benefit all matter. Some trusts are treated as if the beneficiary owns the asset outright. Others fall within the “relevant property” regime, which gives rise to ten-year periodic charges and exit charges when assets leave the trust. Trusts created by a will can also produce different outcomes from those created during a person’s lifetime.

When thinking about trusts and inheritance tax, it helps to ask:

• When is the transfer made? Lifetime or on death.
• Who benefits and in what way? Fixed entitlement, discretionary, right to income, or right to occupy.
• Does an exemption apply? Spouse or civil partner exemption, charity exemption, business or agricultural property relief, disabled beneficiary provisions.
• Will the Residence Nil Rate Band be available? How a home passes to direct descendants can increase or reduce the IHT bill significantly.

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Types of trust and inheritance tax

Discretionary trusts and inheritance tax

A discretionary trust lets trustees decide who receives income or capital within a defined class of potential beneficiaries. No beneficiary has an automatic right to the assets. Because of this flexibility, special tax rules apply.

Lifetime transfers to a discretionary trust

A lifetime gift into a discretionary trust is a chargeable lifetime transfer (CLT). The value above the available nil rate band may be taxed at 20 per cent immediately. If the donor dies within seven years of the transfer, the total is reviewed and further tax may be due up to the full 40 per cent rate, with credit for any tax already paid. Annual exemptions and certain reliefs may reduce the chargeable amount.

The relevant property regime

Discretionary trusts normally fall within the relevant property rules. There is a potential IHT charge on every tenth anniversary of the trust, often called the periodic or principal charge. The effective rate is capped at 6 per cent and depends on the value of the trust, the available nil rate band, and earlier chargeable transfers. Exit charges also arise when assets leave the trust between ten-year points. Smaller trusts that remain within the nil rate band often face little or no charge.

Discretionary will trusts

Where a discretionary trust is set up under a will, assets are assessed for IHT in the deceased’s estate in the usual way at death rates. The trust then enters the relevant property regime going forward. Early appointments out of a discretionary will trust (within two years of death) can sometimes be read back for IHT purposes, so timely specialist advice is important.

When planning around inheritance tax and discretionary trusts, consider how much headroom remains in the nil rate band and whether multiple trusts created on the same day will share that allowance.

Will trusts and inheritance tax

A will trust is created by the terms of a will and takes effect when the person who made the will dies. The IHT position is first settled on the deceased’s estate. The nature of the will trust then determines how assets are treated going forward.

Common examples include discretionary will trusts, life interest (also called interest in possession) will trusts, and trusts for bereaved minors or young people. The correct treatment depends on the wording of the will and the status of the beneficiaries. Because the Residence Nil Rate Band and the spouse exemption can both be affected by how assets pass under a will, it is worth reviewing older wills against current rules.

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Life interest trusts and inheritance tax

A life interest trust (also called an interest in possession trust or life tenant trust) gives a named person the right to income and/or to occupy property during their lifetime. Capital then passes to other beneficiaries when that interest ends.

Created at death

Where a will leaves assets to a life interest trust for a surviving spouse or civil partner, the spouse exemption usually applies, so no IHT falls due at that stage. The underlying assets are treated as part of the life tenant’s estate when they later die. If the life tenant is not an exempt beneficiary, IHT may be due when the trust is created.

Ending a life interest during a person’s lifetime

If the life tenant surrenders the right, or the terms cause it to end (for example, on remarriage), this can be treated as a transfer of value by the life tenant. It may qualify as a potentially exempt transfer if capital passes outright to another individual. Alternatively, it may bring the assets into the relevant property regime if they move into a discretionary arrangement.

Ongoing charges

Traditional immediate post-death interests for individuals do not fall within the relevant property ten-year charge regime while the life interest continues. Instead, the value is aggregated with the life tenant’s estate at death. Successive interests and later changes can alter this position, so specialist advice is needed before varying any terms.

Bare trusts and inheritance tax

A bare trust (also called a simple trust or nominee arrangement) is the most straightforward structure. The beneficiary is absolutely entitled to both capital and income. The trustee holds the asset in name only.

For IHT, a transfer into a bare trust for an individual is treated like a direct gift to that person. It is a potentially exempt transfer (PET). If the person making the gift survives seven years, there is no IHT. If they die within seven years, the gift becomes chargeable and uses up the nil rate band before anything else. Taper relief may then reduce the tax after three years. Taper only helps where the gifts exceed the nil rate band, though. Below that figure there is no tax for it to reduce. There are no ten-year or exit charges because the beneficiary is treated as owning the asset outright.

Bare trusts and inheritance tax planning are often used for gifts to children or grandchildren. However, control is limited once the arrangement is set up, because the beneficiary can demand the asset at adulthood.

Lifetime trusts and inheritance tax

For the purposes of this section, lifetime trusts are trusts created while you are alive, other than bare trusts. In practice, many are discretionary or flexible interest in possession trusts and therefore constitute chargeable lifetime transfers. Care is needed to track earlier gifts, because the nil rate band covers the total of chargeable lifetime transfers made in the seven years before a new one. Larger lifetime transfers can trigger an immediate 20 per cent charge. A recalculation at death rates applies if you die within seven years.

One consequence catches people out. A transfer into trust can affect the tax on a later gift, even when the trust transfer itself was made more than seven years before death. That happens because the seven-year lookback runs from the date of each gift, not from the date of death. In practice the reach can stretch to fourteen years. Our guide to the inheritance tax seven-year rule explains how this works.

Lifetime trusts can remove future growth from your estate and protect vulnerable beneficiaries. However, the IHT cost of entry, the ongoing relevant property charges, and the administrative burden should all be weighed against expected benefits.

Property trusts and inheritance tax

How a home is structured can have a large effect on IHT because of the Residence Nil Rate Band. Passing a qualifying home, or in some cases sale proceeds from downsizing, directly to lineal descendants can secure the extra allowance. Putting the home into certain trusts can block it entirely.

• If a home passes into a discretionary trust on death, the Residence Nil Rate Band is not normally available because no individual is treated as inheriting directly. Exceptionally, if trustees appoint the home, or equivalent value, to direct descendants within two years of death, it may be possible to secure the allowance. This requires timely advice.
• If a home passes into a life interest trust for a direct descendant, the Residence Nil Rate Band can usually still apply, because the beneficiary is treated as inheriting the home.
• If a home is held in a bare trust, or an interest in possession trust where the deceased had the right to occupy, the value is generally included in that person’s estate. This can allow the RNRB to apply when the home ultimately passes to descendants.

Property trusts and inheritance tax planning should always account for care cost planning, remarriage risks, and whether children need protection from third-party claims.

Two warnings belong with that

The first concerns giving away a home you still live in. If you put your house into trust during your lifetime but carry on living there rent-free, HMRC treats it as never having left your estate. This is called a gift with reservation of benefit. It means the arrangement achieves nothing for inheritance tax. To avoid that, you would need to pay a full market rent.

There is a narrow exception. Suppose you give away a share of the home and carry on living there alongside the person you gave it to. If you both genuinely share the property and both pay a fair share of the running costs, the rules may not apply. Check it carefully before relying on it.

The second concerns care fees. These trusts are sometimes sold as a way of protecting a home from care costs. If you transfer a property when care is already in prospect, the local authority can treat it as deliberately depriving yourself of capital. There is no fixed look-back period. They may then assess you as though you still owned the house.

Practical planning points

Here are points to discuss with a solicitor or tax adviser when considering trusts and inheritance tax.

• Review your total estate value against the nil rate band and potential Residence Nil Rate Band before moving assets into trust.
• Check previous gifts made in the last seven years before making a new lifetime transfer to a trust. Earlier chargeable lifetime transfers reduce your available nil rate band.
• Consider whether using up the nil rate band in a lifetime discretionary trust makes sense if your estate will later qualify for the spouse exemption on first death.
• If you want flexibility alongside protection of the Residence Nil Rate Band, consider a life interest trust or a carefully drafted discretionary will trust that allows an early appointment to direct descendants.
• Note that business property relief (BPR) and agricultural property relief (APR) are now subject to a combined £2.5 million cap for 100% relief, with effect from 6 April 2026. Any qualifying assets above that figure attract 50% relief. Any unused allowance can pass to a spouse or civil partner, so a couple may have up to £5 million between them.
• Register the trust with the Trust Registration Service where required, and note the deadlines set out below. Non-compliance can lead to penalties from HMRC.
• Keep accurate records. Trustees need historic values to calculate ten-year and exit charges correctly.
• Revisit wills drafted before recent rule changes, especially those containing nil rate band discretionary trusts that the current rules may have rendered unnecessary or counterproductive.

Trust registration: the deadlines that matter

Most non-taxable UK express trusts created after 6 October 2020 must register within 90 days of being created. Taxable trusts created on or after 6 April 2021 must register within 90 days of becoming liable for tax. Different deadlines can apply to older taxable trusts. Taxable trusts must also confirm by 31 January each year that their details are up to date. Any reportable change, such as a new trustee, must be reported within 90 days.

Executors get some breathing space here. A trust created by a will does not have to be registered if it is wound up within two years of death and is not liable to UK tax. From 30 June 2026, a separate exclusion also applies to trusts set up by deed of variation as part of an estate management process, provided they are not liable to UK tax.

The same regulations introduced an exemption for small, low-risk trusts. Broadly, a trust may qualify if it holds no UK land, holds no assets of appreciable worth over £2,000, has not held property with a cumulative total value over £10,000, has annual income of £5,000 or less, and has no UK tax liability. The exclusion is limited to one trust per settlor. The conditions are detailed, so check them rather than assuming.

Scope widened at the same time. Non-UK trusts holding UK land bought before 6 October 2020 now have to register, with a transitional deadline of 1 September 2027.

Getting advice on trusts and inheritance tax

Trusts and inheritance tax rules are detailed and change regularly. The right approach depends on your family circumstances, asset types, and overall estate value. Errors can be costly, so it is always worth taking advice from a solicitor who specialises in private client work. Where needed, a tax adviser or financial planner should also be involved.

If you are an executor dealing with probate and you discover that the person who died created trusts in the seven years before death, take advice before submitting IHT forms.

How The Probate Network can help

If you are unsure which route to take, The Probate Network can connect you with approved professionals who understand trusts and inheritance tax in England and Wales. Ready to speak to someone? Contact The Probate Network today to arrange an initial conversation.

Frequently asked questions

Does putting assets into trust avoid inheritance tax?

Not automatically. Transferring assets to most types of trust is a chargeable event for IHT purposes. Lifetime transfers to discretionary trusts are chargeable lifetime transfers and may attract an immediate charge. The relevant property regime then imposes ten-year periodic charges and exit charges. Bare trusts are treated differently and can qualify as potentially exempt transfers, but they offer less ongoing control. Taking specialist advice before creating any trust is essential.

Can I use a discretionary trust and still claim the Residence Nil Rate Band?

In most cases, a home passing into a discretionary trust on death does not attract the Residence Nil Rate Band, because no individual is treated as inheriting directly. However, if the trustees appoint the property (or equivalent value) to direct descendants within two years of the death, it may be possible to claim the allowance. This requires prompt action and specialist advice. A life interest trust for a direct descendant is generally more straightforward for securing the RNRB.

What is the difference between a chargeable lifetime transfer and a potentially exempt transfer?

A potentially exempt transfer (PET) is a gift made outright to another individual or into a bare trust. No IHT applies if the person making the gift survives seven years. A chargeable lifetime transfer (CLT) is a gift into a discretionary or similar trust. It may attract an immediate IHT charge at 20 per cent on the value above the nil rate band. If the person dies within seven years, a further review applies and additional tax may be due at the full 40 per cent rate, with credit for any lifetime tax paid.

Do trusts need to be registered with HMRC?

Most UK express trusts must register with HMRC’s Trust Registration Service (TRS). The TRS rules were updated on 30 June 2026, widening registration requirements for some non-UK trusts holding UK property while introducing new exemptions for certain lower-risk arrangements. Registration is done online via GOV.UK. Trustees who fail to register or keep details up to date risk penalties from HMRC. If you are unsure whether your trust needs to be registered under the updated rules, speak to a solicitor or tax adviser.

This article is for general guidance only and does not constitute legal, tax or financial advice. Rules and thresholds can change and every estate is different. For advice on your own circumstances, speak to a qualified professional. You can book a free legal consultation through The Probate Network.