Inheritance tax can take a significant share of what you leave behind, but with the right planning much of it can often be reduced or avoided. Trusts let you protect assets, control how and when loved ones inherit, and plan ahead with confidence.
How inheritance tax works
Inheritance tax (IHT) is charged on the value of a person's estate when they die, and on certain gifts made during their lifetime. Rising property values and frozen allowances mean more families in England & Wales are now affected than ever before, often without realising it until it is too late to plan.
| Allowance or rate | Current position |
|---|---|
| Standard IHT rate | 40% on the value above your allowances |
| Nil-rate band | £325,000 per person |
| Residence nil-rate band | Up to £175,000 where your home passes to direct descendants |
| Residence band taper | Reduced by £1 for every £2 your estate exceeds £2 million |
| Reduced charity rate | 36% if you leave 10% or more of your net estate to charity |
| Thresholds | Frozen until at least April 2031 |
Gifts between spouses and civil partners are generally exempt, and any unused nil-rate band and residence nil-rate band can be transferred to the surviving partner. This means a married couple or civil partners can potentially pass on up to £1 million free of inheritance tax, provided the conditions for the residence nil-rate band are met. Unmarried couples do not benefit from these exemptions, which makes planning especially important for them.
Pensions are changing: from April 2027, most unused pension funds and death benefits are due to be brought into the value of an estate for inheritance tax. If a large part of your wealth is in pensions, now is the time to review your plans.
Ways to legally reduce inheritance tax
There is nothing improper about planning to reduce inheritance tax. The law provides a range of allowances and reliefs, and good planning simply makes sure your family benefits from them:
- Make a will that uses both partners' allowances and directs your home to children or grandchildren to secure the residence nil-rate band.
- Give during your lifetime, using the annual and small gift exemptions and the seven-year rule.
- Give regularly from surplus income: gifts that come from income, form a regular pattern and do not reduce your standard of living are immediately exempt.
- Leave a gift to charity: 10% or more of your net estate reduces the rate on the rest to 36%.
- Use trusts to move assets outside your estate while keeping control of how they are used.
- Take advice on business and agricultural assets, which may qualify for valuable reliefs.
- Consider life insurance written in trust to provide a tax-free fund to help pay any IHT bill.
Lifetime gifts and the seven-year rule
Most gifts to individuals are Potentially Exempt Transfers (PETs). If you survive for seven years after making the gift, it falls completely outside your estate. If you die within seven years, the gift is added back, though taper relief can reduce the tax on gifts made between three and seven years before death where the gifts exceed the nil-rate band.
£3,000 annual exemption
You can give away £3,000 a year in total free of IHT, and carry forward any unused amount for one year.
Plan my gifts£250 small gifts
Give up to £250 per person per tax year to as many people as you like, provided they have not had your annual exemption.
Plan my giftsWedding gifts
Up to £5,000 to a child, £2,500 to a grandchild and £1,000 to anyone else on their marriage or civil partnership.
Plan my giftsGifts from surplus income
Regular gifts from income that leave your lifestyle unaffected are exempt immediately, with no seven-year wait.
Plan my giftsBe careful with gifts where you keep a benefit, such as giving your home to your children but continuing to live in it rent free. These gifts with reservation are usually still treated as part of your estate for inheritance tax.
What is a trust and why use one?
A trust is a legal arrangement where one person, the settlor, gives assets to trustees to look after for the benefit of one or more beneficiaries. Trusts have been used in England & Wales for centuries because they are remarkably flexible. You can use a trust to:
- protect money for children or grandchildren until they are old enough to manage it;
- support a vulnerable or disabled beneficiary without affecting means-tested benefits;
- ring-fence your share of the family home for your children if your partner remarries;
- provide for a surviving partner while keeping capital safe for children from an earlier relationship;
- protect an inheritance from a beneficiary's divorce, bankruptcy or poor decisions;
- form part of a wider inheritance tax plan.
Common types of trust
Bare trust
Assets are held for a named beneficiary, who becomes entitled to them outright at 18. Simple and often used for children and grandchildren.
Start trust planningDiscretionary trust
Trustees decide who benefits, when and how much, from a group of beneficiaries. The most flexible option, offering strong protection.
Start trust planningLife interest trust
One person, often a surviving partner, enjoys the income or the right to live in a property for life, with the capital passing to others afterwards.
Add to my willProperty protection trust
Protects each partner's share of the home, so it ultimately passes to their chosen beneficiaries, often used in mirror wills.
Start mirror willsTrusts can be created during your lifetime or within your will, in which case they take effect when you die. Will trusts are one of the most common and cost-effective ways to protect assets for the next generation.
Trust responsibilities and taxation
Trusts bring legal duties. Trustees must act in the beneficiaries' best interests, keep accurate records and invest prudently. Most trusts, including many created by will, must be registered with HMRC's Trust Registration Service, and some trusts pay inheritance tax charges on creation, every ten years and when assets leave the trust. Income tax and capital gains tax can also apply.
Because the right structure depends entirely on your family, your assets and your goals, trust and inheritance tax planning is always tailored. We provide clear guidance and, where specialist tax or legal advice is needed, refer you to suitably qualified professionals. Pair your plan with an Executor Toolbox so your trustees and executors have everything they need.
The figures on this page are the allowances and rates in force at the time of writing and can change. They are general information, not personal tax or legal advice.
Important: This page provides general information about the law in England & Wales only and is not legal, tax or financial advice. Rules, allowances and fees can change. Your circumstances are unique, so please book a consultation for guidance tailored to you. Complex matters are referred to suitably qualified specialists.