What Is Inheritance Tax and Why Does It Matter?
Inheritance tax (IHT), sometimes nicknamed the “death tax”, is levied on the estate of someone who has died. It typically applies when the estate exceeds certain value thresholds. Currently, the standard nil-rate band is £325,000, with an additional £175,000 residence nil-rate band available when leaving a main home to direct descendants.
However, for estates valued at over £2 million, the residence allowance tapers off. The rate of inheritance tax above these thresholds is a considerable 40%.
According to HMRC, although only 4% of estates currently pay IHT, rising property values mean more families are being drawn into the inheritance tax net each year. For those wishing to preserve intergenerational wealth, understanding IHT is no longer optional—it’s essential.
Looking to reduce inheritance tax legally? Read on to discover how trust and bloodline planning can make a tangible difference.
Trusts Explained: A Legal Strategy to Protect Your Wealth
A trust is a legal arrangement where one party (the settlor) places assets under the control of another (the trustee) for the benefit of third parties (the beneficiaries). Trusts are more than financial containers—they’re strategic vehicles used to manage, protect and pass on wealth.
By transferring assets into a trust, they may no longer be classed as part of your estate for IHT purposes, depending on the structure and the passage of time. This opens the door to significant inheritance tax planning opportunities.
Among the most commonly used types are discretionary trusts and bare trusts—each offering different benefits depending on your goals.
How Discretionary Trusts Help Reduce Inheritance Tax
Discretionary trusts are favoured for their flexibility and control. Trustees are given the discretion to decide when and how assets are distributed, offering protection from financial mishaps, divorce, or poor decision-making.
Advantages:
- Flexibility: Trustees can alter distributions based on beneficiaries’ changing needs.
- Asset Protection: Assets in trust are not usually accessible to creditors or ex-partners.
- Inheritance Tax Efficiency: If assets are transferred into the trust and the settlor survives seven years, they may fall outside the estate.
- Accumulated Wealth: Income can be retained, allowing the trust to grow tax-efficiently.
Disadvantages:
- Initial Tax Charge: Transfers exceeding the nil-rate band may attract a 20% IHT charge.
- Ongoing Administration: Trustees must comply with HMRC’s reporting and filing requirements.
- Complexity: Discretionary trusts for inheritance tax require legal advice for proper structuring.
When managed well, discretionary trusts allow families to retain long-term control of their assets while simultaneously reducing inheritance tax liabilities.
The Pros and Cons of Bare Trusts
Bare trusts offer a simpler structure. The beneficiary is named at the outset and gains full control of the assets at age 18 (or 16 in Scotland).
Advantages:
- Simplicity: Easier and cheaper to set up than discretionary trusts.
- Tax Efficiency: Income is taxed at the beneficiary’s rate, often lower than the settlor’s.
- Inheritance Tax Relief: Gifts into a bare trust may be exempt from IHT if the settlor survives seven years.
- Early Fund Access: Trustees may use funds for the beneficiary’s benefit before they reach 18.
Disadvantages:
- Loss of Control: At 18, the beneficiary gains unrestricted access—problematic if financial maturity is lacking.
- Fixed Beneficiaries: Once named, beneficiaries cannot be changed.
- Limited Protection: Assets may be accessible in the event of the beneficiary’s bankruptcy or divorce.
Bare trusts are often used for simple gifts to children or grandchildren where the settlor is confident in the future beneficiary’s capability and responsibility.
Do Trusts Help You Avoid Probate?
Yes. Trusts can help your estate sidestep the often lengthy probate process. Because the trust—not the individual—owns the assets, they aren’t part of the deceased’s legal estate.
This speeds up access for beneficiaries and can avoid the delay, scrutiny, and potential family conflicts associated with probate. In addition to inheritance tax savings, this makes trusts an attractive option for those looking to simplify the estate distribution process.
Step-by-Step Guide: How to Set Up a Trust in the UK
Setting up a trust requires forethought, structure, and legal expertise. Here’s a roadmap to get started:
- Define Your Purpose
Are you aiming to reduce inheritance tax, protect vulnerable beneficiaries, or plan for intergenerational wealth transfer?
- Select the Trust Type
Choose between a discretionary trust for flexibility or a bare trust for simplicity and immediate gifting.
- Choose Your Beneficiaries
Identify who will benefit—either fixed recipients (bare trust) or a class of beneficiaries (discretionary trust).
- Appoint Trustees
Trustees manage the assets. Choose responsible individuals with sound judgment or professional experience.
- Transfer the Assets
Cash, shares, property, or other valuable items can be transferred into the trust. Timing can affect inheritance tax implications.
- Get Legal Advice
Setting up a trust, particularly one to reduce inheritance tax, should involve guidance from a solicitor. Burbage Finance Ltd works with qualified estate planning solicitors across the UK.
- Review Regularly
Like any financial structure, trusts should evolve with your circumstances, legal changes, or shifts in family dynamics.
Planning to set up a trust? Burbage Finance Ltd offers step-by-step support tailored to your estate planning needs.
FAQs: Inheritance Tax and Trust Planning
Yes. Trusts can reduce your estate’s taxable value if structured correctly and the settlor survives for seven years after transferring assets.
Inheritance tax is charged at 40% on the portion of an estate exceeding the nil-rate band (£325,000) and, where applicable, the residence nil-rate band (£175,000).
Yes. Discretionary trusts face entry charges (if above nil-rate band), 10-year periodic charges, and exit charges when assets are distributed.
Yes, but this may trigger other taxes such as Capital Gains Tax or Stamp Duty Land Tax. It’s essential to weigh the tax savings against potential costs.
While technically optional, legal advice is strongly recommended—especially when using a trust to reduce inheritance tax. Burbage Finance Ltd can connect you with a trusted specialist.
Yes, by setting up a Lasting Power of Attorney. One LPA can cover property and finances; another can handle health and care decisions. Learn more here.
No. Once assets are held in trust, they usually bypass the probate process, allowing for faster, more efficient distribution. Explore probate services.
Conclusion: Trust Burbage Finance Ltd to Reduce Your Inheritance Tax
Trusts are not just for the wealthy. They’re for the wise. With property values rising and more estates crossing inheritance tax thresholds, now is the time to act.
At Burbage Finance Ltd, we help families across the UK preserve their wealth, avoid probate delays, and reduce inheritance tax through proven legal strategies. Whether you need help establishing a trust, drafting your Will, or planning a funeral, our team offers bespoke solutions rooted in experience and regulation.
Protect your family. Preserve your estate. Contact Burbage Finance Ltd today and explore how a trust can reduce your inheritance tax burden.
