Can a trust help protect your estate?

Benjamin Franklin, a founding father of the United States, once famously said “the only things certain in life are death and taxes.”

Nor was he wrong. Here in the UK, taxes have risen steadily under successive governments. These include increases to capital gains tax and corporation tax in recent years. Meanwhile, freezing the thresholds on income tax levels has seen many more people dragged into higher and additional rate tax bands.

And, from April 2027 – less than a year away – unused pension assets will fall into the scope of people’s estates for IHT purposes, increasing the value of the estate. If this exceeds the IHT threshold, the estate (and beneficiaries) could be hit by a 40% tax charge on the surplus above the threshold.

The IHT nil rate band – the threshold above which IHT is payable – has been fixed at £325,000 since 2009 and will stay at this level until at least 2031. Yet if it had grown in line with inflation, it would now be £525,000.

It’s not surprising therefore that growing numbers of people are turning to trusts in a bid to reduce their liability to inheritance tax. Figures from HM Revenue & Customs show that around 121,000 trusts were set up in the tax year 2024/25, up from 115,000 the previous tax year.

Reasons to trust

IHT is charged on the value of your estate when you die. One straightforward way to reduce a future IHT bill is to give money or assets away while you’re alive. If you live for seven years after making the gift, it normally falls outside your estate for IHT purposes.

The catch is that an outright gift is a gift. Once given, you may not be able to control how it’s used – which may matter if you are looking to help family financially. For example, if you gift money to an adult child and they then go through divorce, your gift could form part of a divorce settlement. Alternatively, any money gifted could be vulnerable to creditor claims or poor spending decisions.

Trusts can be a way to make gifts with more structure. Under the terms of a discretionary trust, the trustees (people you appoint) decide who benefits, how much they receive and when. The settlor – the person setting up the trust – can leave guidance in a ‘letter of wishes’ which can be updated as circumstances change.

According to Marcia Banner, tax and trusts specialist at St. James’s Place, discretionary trusts are used in lifetime financial planning because they combine potential IHT benefits with control, flexibility and asset protection.

She says: “Outright gifts can reduce IHT, but a trust can let you make the gift in a controlled way. Trustees act as custodians and can decide who gets what and when. That can help where beneficiaries are young, not financially confident, or where you want to reduce the risk of third party claims, for example after a divorce.”

Trustees can also use trust funds in practical ways. For example, a trust might buy a property that a beneficiary can live in. Because the trust owns the asset, it may offer more protection than gifting the money to the beneficiary directly.

Protecting assets

Trusts can also help with planning across generations. For example, you might want to give money to an adult child, but they may worry that receiving it outright will increase the value of their estate for IHT. With a discretionary trust, the assets can potentially sit outside beneficiaries’ estates while still being available for their benefit.

However, HMRC applies specific IHT charges to some trusts — particularly discretionary trusts — partly because the assets may not be taxed as part of anyone’s estate on death.

How the charges work

Discretionary trusts face potential IHT charges every ten years, known as periodic charges. Each trust has its own nil-rate band (currently £325,000). If the trust’s value is above that band at the 10 year point, the excess may face a charge of up to 6%.

As an example:

• You place £300,000 into a discretionary trust (below the £325,000 nil-rate band), so there’s no immediate IHT to pay.
• By year 10, the trust is worth £400,000.
• The value above the £325,000 nil rate band – £75,000 in this case – is potentially subject to a 6% charge, which must be paid out of the estate,

Even with periodic charges, a trust may still be more tax efficient than leaving the money outside the estate where it might otherwise be taxed at 40% upon death. However, it will depend on the size of the gift, who needs access, and the wider estate plan.

Retaining access to funds

A common question is whether you can reduce the value of your estate but still have access to the money. Sometimes trusts can help, but the rules are strict. The wrong setup can mean the money is still treated as part of your estate for IHT.
For example, if you ‘give’ money away but keep benefiting from it (such as taking income back from the gift), HMRC may treat it as a ‘gift with reservation’. In that case, it can still count as part of your estate for IHT.

One option sometimes discussed is a discounted gift trust (also called a discounted gift arrangement). Broadly, you place a lump sum into a trust for beneficiaries while retaining a right to regular withdrawals*. It can offer IHT benefits in some cases, but it’s complex and needs specialist advice.

Trusts can be powerful, but they’re not “set and forget” — and many are difficult or impossible to unwind once established. If you’re considering a trust, take professional advice so it fits your family’s needs, your tax position and your long term plans.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances.

*Please note that if the withdrawals taken exceed the growth of the Bond, the capital will be eroded.

Trusts are not regulated by the Financial Conduct Authority.

Source

¹Statistics on trusts in the UK – HM Revenue & Customs, 18 December 2025