When to give and How to give
For Tax Efficiency
Trusts can be an important part of inheritance tax and estate planning, but their tax treatment depends heavily on the type of trust, the assets involved, and who benefits.
The £325,000 Inheritance Tax nil-rate band is relevant to many trust-related IHT calculations. Depending on the type of trust and individual circumstances, trusts may help with tax-efficient estate planning when passing assets to children and family.
There are principally the following types of Trusts::
Bare trusts
Those trusts give the beneficiary rights to all the capital and income
For example, a trust set up in somebody’s name gives them access to the capital and benefits at any time.
Interest in possession trusts
Those trusts put an obligation on the trustee to pass on all trust income to the beneficiary
This can include, for example, income from rented property put in trust.
Discretionary trusts
The most flexible trusts (frequent option when giving to children), as they facilitate flexibility in giving.
With this option, the trustee can decide how much, to whom, and what portion of the trust's value and benefits is allocated.
The benefactor can also impose conditions on beneficiaries.
Accumulation trusts
With this option, the trustees can accumulate income within the trust and add it to the trust’s capital, or pay income out (as with a discretionary trust)
Mixed trusts
Mixed trusts combine one or more trusts and can be set up on requirement.
Settlor-interested trusts
These are set up for the benefit of a spouse or civil partner as an interest-in-possession, accumulation, or discretionary trust.
Non-resident trust
Where the trustees are non-UK residents for tax purposes.
Income from Trusts is taxed outside a Personal Allowance, and on disposal of the trust at 24% Capital Gains Tax. Capital Gains Tax Annual Exempt Amount is £1,500 for 2026/27
Certain transfers into a trust can trigger an Inheritance Tax charge of 20%, while relevant property may also be subject to charges at each 10-year anniversary and when assets leave the trust. The 10-year charge can be up to 6%, depending on the circumstances.
Trusts can therefore be particularly relevant to property owners considering their estate-planning options. However, they involve costs and ongoing administrative responsibilities, including setting up and administering the trust.
A trust may form part of an estate-planning strategy, but whether it is appropriate depends on the individual's circumstances, the assets involved and the type of trust used.
Trusts are complicated, and HMRC itself stresses that the calculations can be complex.
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