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Trusts

Do trusts avoid UK inheritance tax?

Answered by Jordan Onraet-Wells, Founder & Chartered Tax Adviser (CTA). Published 9 August 2026. Last reviewed 9 August 2026.

The short answer

No, not in any straightforward sense. Most lifetime trusts sit in the relevant property regime, which charges inheritance tax at three points: 20% on what you put in above the £325,000 nil-rate band, up to 6% on every ten-year anniversary, and up to 6% when capital leaves. The regime exists precisely so assets cannot escape inheritance tax indefinitely by sitting in trust. What trusts do offer is deliberately lighter charges than the 40% death rate, plus control, protection and structured generational planning, which is why families still use them.

  • The entry charge is 20% on lifetime transfers into a relevant property trust above the available £325,000 nil-rate band, rising to an effective 25% if the settlor pays the tax personally.
  • The ten-year anniversary charge is capped at 6% of the value above the trust's nil-rate band; in practice the effective rate across the whole fund is usually only a few per cent.
  • Exit charges of up to 6% are proportionate to the complete quarters elapsed since the trust began or the last anniversary.
  • Each trust has its own £325,000 nil-rate band, but related settlements and same-day additions stop settlors multiplying the allowance by creating several trusts at once.
  • From 6 April 2026, 100% business and agricultural relief is capped at £2,500,000 combined per person, and from 6 April 2027 most unused pension funds fall within the estate.

The three charge points

For most discretionary and modern lifetime trusts, inheritance tax can bite when assets go in, while they sit there, and when they come out. A gift into a discretionary trust is a chargeable lifetime transfer, not a potentially exempt transfer, so 20% is due immediately on anything above the available nil-rate band, and an early death within seven years reassesses the transfer at the full death rate with credit for tax paid. Every ten years the trustees face the principal charge of up to 6% on relevant property above the trust's own £325,000 band, reported on form IHT100d, and a proportionate exit charge of up to 6% applies when capital leaves. Our guide to trusts and inheritance tax walks through each calculation.

Why the charges are lighter than 40%

The trade-off is deliberate: smaller charges spread across the life of the trust instead of one 40% charge on death. Because the first £325,000 is sheltered by the trust's nil-rate band, a trust worth £650,000 is only charged on the top half, so the actual ten-year tax is around 3% of the whole fund, and a trust kept within the band may pay nothing at all. Not every trust is caught either: bare trusts are broadly transparent, treated as an outright gift to the beneficiary with a 7-year clock and no trust charges, and qualifying interest-in-possession trusts are taxed by reference to the life tenant's estate instead. Offshore structures follow the separate excluded property rules, which moved to a residence basis on 6 April 2025.

When trusts still make sense

Families rarely use trusts purely for the tax arithmetic. A trust separates control from benefit: trustees you choose decide when and how much reaches each beneficiary, assets can be insulated from a beneficiary's divorce, creditors or vulnerability, and capital can provide for a surviving partner before passing to children in a structured way. Recent reforms make advice more important, not less: from 6 April 2026, 100% business and agricultural relief is capped at £2,500,000 of combined qualifying property per person, with 50% relief above that, and this cap applies inside trusts at ten-year and exit charges; from 6 April 2027 most unused pension funds join the estate. If you are weighing a trust against other ways to reduce inheritance tax, Horizon advises on fixed fees agreed upfront, and you can book a free clarity call at /book.

Go deeper

Sources and further reading

This is general information for the 2026/27 UK tax year, not personal tax advice; speak to a Chartered Tax Adviser about your own position.

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