Setting up a trust is more than executing a legal document, it is a strategic decision with long-term tax, legal, and practical implications. With expert support from our solicitors, you can ensure the trust is structured appropriately and administered correctly, giving you confidence that your objectives are met and your family’s future is protected.
If you are considering establishing a trust, our team can guide you through every step of the process.
- Inheritance Tax (IHT) Planning
Using the Nil-Rate Band
When assets are transferred into certain trusts (such as a Discretionary trust), the settlor can use their available nil-rate band (£325,000). Provided the transfer falls within that threshold, there is no immediate lifetime IHT charge.
If the settlor survives seven years from the date of the gift into trust, the value typically falls outside their estate for IHT purposes. This can significantly reduce the taxable estate on death.
Removing Future Growth from the Estate
Once assets are placed into trust:
- The future capital growth occurs outside the settlor’s estate (after seven years for lifetime transfers).
- This can be particularly effective for business assets, investment portfolios, or property expected to increase in value.
By freezing the value for IHT purposes at the time of transfer, future appreciation escapes the 40% IHT charge on death.
Asset Protection for Family Wealth
Trusts can prevent assets passing outright to beneficiaries, reducing risks such as:
- Divorce claims
- Bankruptcy
- Poor monetary management
Preserving capital in this way can protect family wealth across generations, indirectly improving long-term tax efficiency.
- Residence Nil-Rate Band (RNRB) Planning
Certain will trusts, including Life interest trust arrangements, can preserve access to the Residence Nil-Rate Band (RNRB) when passing property to direct descendants.
Without careful structuring, estates may lose access to this additional allowance. A properly drafted trust can ensure reliefs are maintained while still providing flexibility and protection.
- Capital Gains Tax (CGT) Advantages
Trusts can offer CGT planning opportunities, including:
- Hold-over relief on lifetime transfers into relevant property trusts (deferring CGT).
- Annual CGT exemptions for trustees (albeit smaller than individual allowances).
- Re-basing of assets on death in certain circumstances.
This allows gains to be managed strategically, rather than crystallised immediately.
- Income Tax Planning
While discretionary trusts are taxed at higher income tax rates, they can still be tax efficient in family planning scenarios because:
- Income can be distributed to beneficiaries who may have lower personal tax rates.
- Certain trusts for vulnerable beneficiaries (such as a Vulnerable beneficiary trust) may qualify for special tax treatment aligned with the beneficiary’s own tax position.
This creates flexibility in how income is assessed and taxed across the family.
- Controlled Succession Planning
Trusts allow wealth to pass in stages rather than outright. For example:
- An Interest in possession trust can provide income to a surviving spouse while preserving capital for children.
- A discretionary trust allows trustees to adapt distributions according to future circumstances.
This flexibility can avoid unintended tax consequences caused by rigid or outdated estate plans.
Important Considerations
Trusts are not automatically tax efficient. Some types, particularly relevant property trusts are subject to:
- 10-year periodic IHT charges
- Exit charges when assets leave the trust.
- Higher income tax rates
Therefore, tax efficiency depends on:
- The type of trust used.
- The value and nature of the assets
- The settlor’s wider estate
- Long-term planning objectives
Conclusion
Trusts are tax efficient not because they eliminate tax, but because they:
- Reduce exposure to 40% IHT.
- Remove future growth from the estate.
- Allow controlled and flexible distribution.
- Provide access to reliefs and deferral mechanisms.
When carefully structured and professionally advised, trusts can form a powerful part of a long-term estate planning strategy — balancing tax efficiency with asset protection and family governance.
