Trusts and Inheritance Tax: Can a Trust Protect Your Family's Wealth?

If you own a home, savings or investments, you may have heard that putting assets into a trust can protect your family’s wealth. A trust can be useful for managing an inheritance, providing for a spouse or supporting a vulnerable beneficiary. But it is not a simple way to make assets tax-free or shield them from every future claim.

The right answer depends on the trust’s terms, the assets, who benefits, what control you retain and the taxes that apply. This guide explains the main trust types, how IHT can arise and what to check before transferring assets. It reflects published rules and Budget 2026 announcements as at 28 October 2026; some announced measures still require legislation.

What is a trust?

A trust is a legal arrangement in which trustees hold and manage assets for beneficiaries under the terms of a trust deed, will or other legal arrangement.

• The settlor creates the trust or transfers assets into it.
• The trustees hold the legal title and must act in accordance with the trust terms and their duties.
• The beneficiaries may receive income, capital or another benefit, depending on the trust.

Trusts can hold money, investments, land, property and other assets. Some are created during a person’s lifetime; a will can also create a trust that begins after death. The exact rights of the people involved depend on the structure and its wording.

Why do families use trusts?

Families may use trusts to manage an inheritance for children, provide for a surviving spouse while preserving capital for other beneficiaries, or arrange financial support for someone who cannot manage assets independently. Some trusts can also be part of a wider estate plan.

These aims are not the same as reducing IHT. A trust can create tax charges and administration, and transferring assets may mean giving up access or control. A trust should solve a real legal or family need—not be set up solely because it has been described as a tax-saving device.

Common types of trust

Bare trusts

The beneficiary has an absolute right to the trust assets and income. The trustee manages the assets but generally cannot change who is entitled to them. In England and Wales, a beneficiary can usually take control at 18; in Scotland, the age is generally 16. The beneficiary’s entitlement means a bare trust offers less ongoing control than a discretionary trust.

Discretionary trusts

Trustees decide which beneficiaries receive income or capital, when and in what amount, within the trust terms. This can offer flexibility if family circumstances change, but the tax and reporting rules can be more involved. Many discretionary trusts fall within the relevant property regime and may have entry, periodic and exit charges.

Interest in possession trusts

A beneficiary may have a right to trust income as it arises or to use trust property, while someone else may ultimately receive the capital. For example, a will could provide a surviving spouse with income during their lifetime, with the remaining capital passing to children afterwards. IHT treatment depends on when the trust was created and its precise terms; a life interest does not automatically remove assets from IHT.

Will trusts and trusts for vulnerable beneficiaries

A will trust is created under a will and takes effect after death. Specific arrangements can also be made for qualifying disabled or vulnerable beneficiaries, bereaved minors and young people. These trusts may have special rules, but eligibility and tax treatment are specific. Ask a specialist to check the proposed arrangement.

HMRC’s guide to types of trust explains how structures differ.

How Inheritance Tax can apply to trusts

IHT may arise when assets are transferred into a trust, at ten-year anniversaries for some trusts, when assets leave certain trusts, or when a person dies and a trust is relevant to their estate. Not every trust has the same charges.

When assets go into a trust

Transfers into many discretionary and other relevant property trusts are immediately chargeable lifetime transfers. In working out whether an entry charge is due, the value transferred is considered alongside relevant chargeable transfers made by the settlor in the previous seven years and available exemptions or reliefs. If the chargeable amount exceeds the available nil-rate band, trustees generally pay IHT at 20% on the amount above it. If the settlor pays the tax, the calculation can increase because that payment is an additional benefit to the trust.

This is different from an outright gift to an individual, which may be a potentially exempt transfer. A transfer into a discretionary trust does not simply become tax-free after seven years: if the settlor dies within seven years, additional IHT may be due, with the calculation taking account of the original transfer, tax already paid and other transfers. The precise result depends on the facts.

Ten-year and exit charges

Relevant property trusts may face an IHT charge at each ten-year anniversary. A charge may also arise when assets leave the trust. The effective maximum rate is generally up to 6%, but the actual amount depends on the trust assets, reliefs, available nil-rate band, transfers and the trust’s history. It may be lower or nil.

These charges can make a trust less suitable if the plan is to transfer assets out soon or if the family has not budgeted for ongoing administration. HMRC’s detailed guidance on IHT and trusts explains how the calculations work.

What did the Autumn Budget 2026 change for trusts?

The Budget announced legislation to clarify how liabilities properly incurred by trustees are taken into account when valuing settled property for IHT. It will align their treatment with personal liabilities and extend debt-deduction restrictions and anti-avoidance rules where certain liabilities are funded using value originating from a beneficiary’s own estate.

The measure is stated to take effect for deaths and other chargeable events on or after 28 October 2026. It is a targeted rule about liabilities and trust property—not a general rule that every trust debt is ignored or that all trusts automatically pay more tax. Legislation is to be introduced in Finance Bill 2026–27, so trustees should check the enacted rules and HMRC guidance before relying on the details.

If a trust owns assets subject to borrowing or other liabilities, keep clear records showing why the liability was incurred, who funded it and how it relates to the trust property. Seek specialist advice before changing the arrangement.

Can putting your home into a trust reduce IHT?

Transferring a home into a trust does not automatically remove it from your estate for IHT. If you give away a home but continue living there without paying a full market rent, gift-with-reservation rules may mean it is still treated as part of your estate. You may also face Capital Gains Tax, Stamp Duty Land Tax or devolved property transaction taxes, mortgage-lender requirements and legal costs.

There may also be practical consequences: you could lose control or access to an asset you later need. A trust should not be used to try to avoid care fees, creditors, divorce claims or other legal obligations; outcomes depend on the circumstances and the relevant law, and no structure guarantees protection from every risk.

For many homeowners, the sensible first step is to review their will, ownership arrangements and available IHT allowances. Read our guides to IHT and your home and the options for reducing an IHT bill.

Trusts and outright gifts compared

Neither option is universally better. An outright gift may be simpler but means giving up control; a trust can offer more structure but may cost more and carry separate tax charges. Compare the full legal and tax position before deciding.

Potential benefits and drawbacks

A trust may help with

• Managing assets for children or beneficiaries who need support.
• Providing for a spouse while directing where capital passes later.
• Giving trustees discretion to respond to changing family circumstances.
• Organising long-term succession and professional management of assets.

A trust may also mean

• Entry, ten-year or exit IHT charges, depending on the trust.
• Income Tax, Capital Gains Tax or property transaction taxes.
• Legal and accounting fees, record keeping and trustee decisions.
• Reduced access to assets and less personal control.

Setting up and administering a trust

1. Define the purpose. Be clear about the family or asset-management problem the trust should solve.
2. Compare structures. Ask a specialist to explain who benefits, who controls assets and the tax consequences.
3. Choose trustees carefully. They must be willing and able to take on ongoing legal duties.
4. Prepare the documents and transfer correctly. Property, investments and other assets may each need separate steps.
5. Check registration and reporting. Some trusts must be registered with HMRC’s Trust Registration Service, even if they do not owe tax. Check the current trust registration guidance.

Frequently asked questions

Do trusts avoid Inheritance Tax?

No. Some trust arrangements can form part of estate planning, but transfers may be taxed and some trusts face periodic and exit charges. The rules depend on the trust type and circumstances.

Is a trust better than a will?

They do different jobs. A will directs how your estate is dealt with after death and can create a trust. A lifetime trust holds and manages assets under its own terms while you are alive.

Can I put my home in a trust and keep living there?

This may be possible in some circumstances, but living in a home after giving it away without paying full market rent can trigger gift-with-reservation rules. Get advice before making any transfer.

Does the seven-year rule apply to every trust?

No. Qualifying outright gifts to individuals are generally potentially exempt transfers. Many transfers into discretionary trusts are immediately chargeable instead. Death within seven years can affect the IHT calculation, but it does not make every trust transfer operate like an outright gift.

Can a trust protect assets from creditors or divorce?

A trust does not guarantee protection from creditors, divorce claims or other legal risks. The outcome depends on the trust, timing, purpose, control and applicable law. Do not transfer assets to defeat existing or anticipated claims.

Sources and further reading

• HMRC: Trusts and Inheritance Tax
• HMRC: Detailed guidance on IHT and trusts
• HMRC: Budget 2026 tax legislation overview
• Business and agricultural property relief changes
• Inheritance tax planning guide