Inheritance Tax (IHT) has a habit of becoming a “headline tax” whenever there’s a Budget or a wobble in the wider economy. With the UK Autumn Budget 2025 long announced, many families are looking again at whether their estate planning is still fit for purpose, and if there’s an opportunity to avoid inheritance tax.
One of the most common questions our clients ask us is some variation of: “can I set up a trust to avoid inheritance tax?”
Trusts can, in the right circumstances, reduce the IHT bill or move value outside your estate, but they’re not a loophole you can simply step into. HMRC’s rules are detailed, and the tax treatment depends heavily on the type of trust, what you put into it, and whether you truly give up benefit and control.
What follows is a practical guide to how inheritance tax avoidance trusts really work, where they help, where they don’t, and what we typically consider when advising our clients.
This article is for general information only and does not constitute legal or tax advice. Advice should be taken based on your individual circumstances.
A quick refresher on the workings of IHT
In broad terms, IHT is charged at 40% on the value of an estate above the available tax-free thresholds. There is a reduced 36% rate in some cases where at least 10% of the net estate is left to charity.
The basic nil-rate band is £325,000, and there is also the residence nil-rate band (often discussed as £175,000) for certain estates where a qualifying home is left to direct descendants. The residence band can taper away for larger estates; broadly, it reduces by £1 for every £2 above £2 million.
Budget 2025 has kept the spotlight firmly on IHT because it extended the freeze of these thresholds further. Professional commentary on the Autumn Budget 2025 confirms the nil-rate band (£325,000) and residence nil-rate band (£175,000) are being frozen through to April 2031.
For a more detailed look at the workings of IHT, refer to our legal guide, How Does Inheritance Tax Work? Everything You Need to Know in 2026.
What is a trust, and why can it affect IHT?
A trust is a legal arrangement where trustees hold assets for the benefit of named beneficiaries, following the rules in a trust deed (or the trust provisions in a will). The IHT logic is straightforward: if assets are genuinely transferred into a trust in a way HMRC recognises as effective, those assets normally won’t be counted as part of your estate when IHT is calculated.
However, the detail is everything. Some trusts can trigger their own IHT charges during your lifetime, and some “trust planning” fails completely if you keep enjoying the asset as if nothing has changed. Which is why professional advice is essential if you want to do this properly.
The biggest trap: giving it away, but keeping the benefit
If you transfer something into a trust but continue to benefit from it, HMRC may treat the planning as ineffective under the “gift with reservation of benefit” rules. A straightforward example HMRC gives is gifting a property but continuing to live in it until death – those are exactly the “strings attached” the legislation is designed to counter.
This is why we often say trust planning only works when the legal reality matches the practical reality. If a trust is created on paper, but day-to-day you still treat the asset as yours, HMRC may still treat it as part of your estate.
So, when we talk about setting up a trust to avoid inheritance tax, which trusts are we actually referring to?
Types of inheritance tax avoidance trusts
Most of the conversations about trust funds to avoid inheritance tax fall into a handful of common trust types. In practice, the right fit depends on what you are trying to achieve:
- tax reduction,
- control over who receives what and when,
- protecting beneficiaries,
- or dealing with cross-border complications.
Bare trusts
A bare trust is the simplest form, often used for children or grandchildren. The beneficiary is absolutely entitled to the assets, even if trustees hold them for administration. In many scenarios, the IHT effect is closer to an outright gift than the more complex trust regimes, but it still needs to be planned properly and timed sensibly.
Discretionary trusts
Discretionary trusts are where a lot of IHT planning interest sits, because they offer flexibility. Trustees can decide how and when to distribute income and capital across a class of beneficiaries.
That flexibility comes with a specific tax profile: discretionary trusts are often subject to an “entry” charge in some circumstances, ten-yearly (periodic) charges, and “exit” charges when assets leave the trust.
HMRC’s guidance notes that IHT can be charged up to a maximum of 6% on assets transferred out of a trust (an exit charge) for relevant property trusts. In other words, some trust structures don’t eliminate tax so much as reshape it – sometimes beneficially, sometimes not, depending on the numbers and your aims.
Life interest trusts
Life interest trusts (often used in wills) are also common, especially for couples, second marriages, and blended families. The typical goal is to provide security for one person during their lifetime, such as the right to live in a property or receive income, while preserving the capital for children later.
This is often less about chasing “avoidance” and more about achieving a fair outcome with protection and clarity.
Wills
Finally, it’s worth noting that not all trust planning happens during one’s lifetime. Will trusts can be built into your will and only take effect on death, which can be a very practical way to control how an estate is managed and distributed.
Trusts can reduce IHT, but they’re not a shortcut
It’s tempting to look for a single manoeuvre that “fixes” IHT. The reality is more nuanced.
Trusts can reduce IHT exposure when they are used for the right reasons, structured properly, and implemented early enough to make sense. But trusts can also create their own tax charges, administration burdens, and compliance requirements.
- HMRC’s Trust Registration Service rules mean many trusts must be registered and kept up to date, often within set deadlines.
- HMRC’s internal guidance confirms registrable non-taxable express trusts generally must register within 90 days of becoming registrable.
This is why “inheritance tax avoidance trusts” is slightly misleading as a concept. Trusts are a legitimate planning tool, but they need to be aligned with your family’s goals, and they must stand up to HMRC’s anti-avoidance rules around retained benefit and control.
When a trust and probate cross borders
If you have assets overseas, beneficiaries abroad, or family connections outside the UK, planning becomes more complex, quickly. Different countries have different succession rules, different tax regimes, and different administrative requirements.
Even where UK IHT is the central concern, the cross-border executry/probate process can add time, cost, and risk if it isn’t handled carefully.
That’s why international executry and probate work often needs a joined-up approach: you’re not only planning for tax, you’re planning for an estate to be administered smoothly, with the correct documentation in the correct jurisdictions.
A Scottish practical note: “probate” vs “Confirmation”
IHT rules apply UK-wide, but the estate administration process is different in Scotland. In many cases, executors apply for “Confirmation” through the Sheriff Court system, rather than “probate” in the English sense.
That difference matters because trust provisions in a will, and the way assets are gathered in and transferred, should be drafted with Scottish executry realities in mind.
What we look at when advising on trust-based IHT planning
When someone asks about setting up a trust to avoid inheritance tax, the starting point is usually not the trust document but rather the objective.
Our Glasgow-based inheritance tax solicitors look at
- what you’re trying to protect (a spouse, children, vulnerable beneficiaries)
- what you’re trying to achieve (control, fairness, protection, tax efficiency)
- what assets are involved (cash, investments, property, business interests, overseas assets)
- what your realistic timescale is
We then consider whether any “strings attached” could undermine the plan under the gift-with-reservation rules.
Only after that do we match the trust structure to the goal and model the tax consequences, including any relevant property charges where applicable, and the registration and ongoing compliance obligations.
Get in touch for a free consultation
Trusts remain a useful and legitimate part of inheritance tax planning, but they work best when they are used for clear family and succession reasons, not as a last-minute tax manoeuvre. The UK government’s budget announcements continue to reinforce why people are paying attention: threshold freezes have been extended, and that tends to pull more estates into IHT over time.
If you’re concerned about how IHT might affect your estate, it’s worth getting tailored advice before making irreversible changes.
Neil Kilcoyne Solicitors can support you with inheritance tax planning and, where there’s a cross-border element, international executry and probate, so your plan is not only tax-aware but also workable in practice.
Contact our inheritance tax planning solicitors for clear, practical advice on cross-border inheritance, executry, confirmation, and inheritance tax matters. Call us on 0141 433 2700, email us at admin@kilcoyne-solicitors.co.uk, or fill out the form below to arrange a free, no-obligation consultation.
This article is for general information only and does not constitute legal or tax advice. Advice should be taken based on your individual circumstances.
