Can I Avoid Inheritance Tax with a Trust in the UK? A Smart Estate Planning Strategy

Belgravia Capital
May 31
4 min read

If you’ve been researching ways to protect your wealth and pass it on efficiently, chances are you’ve come across the idea of using a trust.

It’s one of the most powerful - and misunderstood - tools in inheritance tax planning.

One of the most common questions we hear is:

“Can I avoid inheritance tax with a trust?”

The answer:

You can reduce or mitigate inheritance tax with a trust - but not avoid it entirely.

UK tax law has evolved to prevent trusts from being used as tax shelters, yet when set up and managed correctly, they remain an effective strategy for wealth preservation.

In this guide, Belgravia Capital Wealth Management explains how trusts work, the types available, and how they can help manage your inheritance tax exposure.

What Is a Trust?

A trust is a legal arrangement where you (the settlor) transfer assets to be managed by trustees for the benefit of beneficiaries.

The settlor creates the trust
Trustees hold and manage the assets
Beneficiaries receive income or capital from the trust

Trusts separate ownership from benefit, which can move assets out of your estate, potentially reducing your Inheritance Tax (IHT) liability.

How Trusts Affect Inheritance Tax

The UK tax system recognises several types of trusts - and each is treated differently for IHT purposes.

Some trusts can:

Reduce the value of your estate
Delay or distribute IHT liabilities over time
Provide long-term asset protection for future generations

However, trusts do not eliminate IHT altogether.

Since 2006, HMRC has tightened the rules, especially for discretionary trusts.

Types of Trusts and Their IHT Treatment

1. Bare Trusts

Assets belong to the beneficiary outright.
Once gifted into the trust, the value leaves your estate after 7 years.
Simple and commonly used for gifts to children.

2. Discretionary Trusts

Trustees have full discretion over who receives what and when
Gifts into the trust are immediately subject to a 20% lifetime IHT charge if they exceed the nil-rate band (£325,000).
Also subject to 10-year periodic charges (up to 6%) and exit charges.

3. Interest in Possession Trusts

The beneficiary has the legal right to income from the trust.
May be treated as part of the beneficiary’s or settlor’s estate depending on structure.
Often used in wills to provide for a surviving spouse while protecting capital for children.

4. Trusts for Vulnerable Beneficiaries

Special IHT and income tax advantages apply.
Often used for disabled or dependent beneficiaries.

Can a Trust Help You Avoid Inheritance Tax?

A trust can help you manage and reduce your IHT bill by:

Moving assets out of your estate (subject to 7-year rule or immediate tax)
Controlling how wealth is passed down over generations
Protecting assets from misuse, divorce, or third-party claims

But it won’t eliminate IHT altogether.

Example:

You place £500,000 into a discretionary trust.
£325,000 is covered by your nil-rate band.- The excess £175,000 is taxed at 20% = £35,000 IHT charge.
After 7 years, that money is no longer part of your estate.

Why Use a Trust Instead of a Simple Gift?

Trusts offer control and flexibility:

You decide how, when, and to whom distributions are made.
Ideal for young beneficiaries or complex family situations.
Useful for protecting assets in blended families or second marriages.

Unlike outright gifts, trusts allow you to plan for multiple generations.

Trust Planning: Key Considerations

Trusts must be registered with HMRC’s Trust Registration Service (TRS)
Trustees have ongoing responsibilities (tax returns, compliance, reporting)
IHT, income tax, and capital gains tax may all apply
Lifetime transfers above the nil-rate band are subject to immediate IHT
Periodic and exit charges apply for most trusts

Given the complexity, trusts should be set up with professional advice.

Common Misconceptions About Trusts and IHT

“Trusts are a tax loophole” — False. HMRC closely monitors and taxes trusts.

“I won’t pay any IHT if I use a trust” — False. You may defer or spread the tax, but it still applies.

“All trusts are treated the same” — False. Tax treatment depends on the type and structure.

When Trusts Work Best

Trusts are particularly valuable when:

You want to reduce IHT but retain control over how the money is used
You have children or grandchildren not ready to inherit large sums
You want to provide for a vulnerable or disabled beneficiary
You want to ringfence assets from remarriage, divorce, or bankruptcy

How Belgravia Capital Wealth Management Can Help with Trusts for IHT planning

At Belgravia Capital, we provide strategic trust planning as part of a wider estate strategy.

We help you:

Choose the right type of trust for your goals
Understand the tax implications
Work alongside legal professionals to structure your trust efficiently
Register and manage your trust in line with HMRC compliance

Whether you’re planning for children, grandchildren, or a complex family situation - we offer solutions tailored to you.

Conclusion: Can You Avoid Inheritance Tax with a Trust?

Not entirely - but you can reduce it, control how tax is applied, and protect family wealth over the long term.

Trusts are not tax loopholes - they’re legal, powerful planning tools when used correctly.

With the right structure and advice, they can be a vital part of your legacy planning.

Need help deciding if a trust is right for your estate plan?