How can Trusts mitigate Inheritance Tax?

Using Trusts to Reduce Inheritance Tax and Preserve Wealth

Inheritance Tax (IHT) is a significant concern for individuals looking to pass on their wealth to loved ones. With the current IHT threshold set at £325,000 per individual, any value above this is taxed at 40%. However, through careful estate planning and the strategic use of trusts, it’s possible to significantly reduce your IHT liability and ensure more of your wealth is preserved for future generations.

What Is a Trust?

A trust is a legal arrangement where assets are transferred to a trustee, who manages them on behalf of the beneficiaries. Trusts can be set up during your lifetime (lifetime trusts) or through your Will (testamentary trusts).

How Trusts Help Mitigate Inheritance Tax

1. Lifetime Gifts into Trust

By transferring assets into a trust during your lifetime, those assets can be removed from your estate for IHT purposes—provided certain conditions are met. Early gifting allows any future asset growth to occur outside your estate, maximising tax efficiency.

2. Utilising the Nil-Rate Band

Everyone has a nil-rate band (£325,000) exempt from IHT. Married couples or civil partners can combine allowances, effectively doubling it to £650,000. Trusts can be structured to fully utilise both partners’ nil-rate bands, reducing the taxable value of your estate.

3. Discretionary Trusts

A discretionary trust offers flexibility and control, allowing trustees to decide when and how beneficiaries receive assets. These trusts are ideal for complex family dynamics or long-term legacy planning, while also helping to minimise IHT.

4. Business and Agricultural Property Relief

Assets such as business interests and agricultural land may qualify for IHT reliefs of up to 100%. Placing these assets into trusts that meet relief criteria can result in significant tax savings, though professional advice is essential to meet the specific requirements.

5. Charitable Trusts

Gifting to charity through a charitable trust can be an effective IHT strategy. Not only are these assets exempt from IHT, but estates leaving 10% or more to charity may qualify for a reduced IHT rate of 36%.

Leave a Lasting Legacy

Without planning, IHT can erode the wealth you’ve built. By using trusts strategically, you can minimise tax, protect your assets, and ensure your beneficiaries receive the inheritance you intended. Always seek professional estate planning advice to implement the best trust strategy for your goals and circumstances