Following the UK Government’s 2024 budget changes to inheritance tax (IHT), trusts are increasingly becoming more important in estate planning. There are various different types of trust, and even amid the current shifting legislation, they remain a valuable tool for tax-efficient wealth transfer. Let’s look at what you need to know when it comes to trusts and inheritance tax planning. 

There have been growing concerns over increased inheritance tax and family wealth transfer. From 2026, inheritance tax relief for agricultural assets will be capped at £1 million with a new 20% rate above this threshold. From 2027, pensions will no longer be exempt from inheritance tax, which could significantly increase the value of people’s estates.   

Without the proper planning in place, a significant proportion of your estate could be lost to inheritance tax – up to 40% of your legacy above the available allowances could go to HMRC upon death. By taking a proactive approach to inheritance tax and your estate planning, you can help to protect your family wealth for future generations. 

Trusts and Estate Planning 

The use of trusts and gifting rules, combined with life insurance can provide a financial safety net for you and your family. However, it’s important to get advice from experts, such as solicitors and accountants, or our financial planning team. 

Different types of trusts 

Trusts involve a trustee, settlor, and beneficiary and are taxed according to their type. We have listed different types of trusts below, which offer varying benefits for people’s estates:

• Bare or Absolute Trusts – The simplest of the trusts, but they offer no flexibility. Held in the name of a trustee for the benefit of another (beneficiary), they allow the beneficiary access to the trust’s capital and income once they reach a certain age (16 in Scotland, 18 in England and Wales). The beneficiary is fixed and cannot be changed. The income and gains are taxed at the beneficiary’s rate; therefore, they are often used by parents or grandparents for young people. The amount in the trust passes to the beneficiary fully when they reach the required age, whether or not they are ready to manage the money themselves. 
• Discretionary Trusts – These are flexible trusts that give trustees the power to decide how to use the trust income and sometimes the capital. This includes who receives payments, how often, and under what conditions. They are often used for future needs or beneficiaries who may not be responsible enough to manage money. With more flexibility comes more tax, and these are subject to a higher trust rate of income and capital gains tax, and they may be subject to IHT charges as well.
• Flexible Reversionary Trust – allows the settlor to make a gift into a trust and receive periodic payments, while retaining a reversionary interest. This type of trust is a mix of a Discretionary and Bare/Absolute Trust, giving a balance between giving capital away (to reduce IHT over time) and retaining potential access if needed. These trusts have higher tax rates for income and CGT, as well as potential IHT charges. 
• Accumulation Trusts – allow trustees to accumulate income within the trust, adding it to the capital. They might also have the option to distribute income like a Discretionary Trust. These trusts are typically used for a young or financially inexperienced beneficiary to delay access to the funds until a certain age. 
• Mixed Trusts – combine multiple types of trust, each part is taxed according to its respective rules. Often used for complex family or estate planning scenarios. 
• Settlor-Interested Trusts – benefit the settlor, their spouse or civil partner, and could be an interest in a Possession, Accumulation or Discretionary Trust. 

Financial Advisor, West Bridgford

If you’re looking at ways to reduce your potential inheritance tax (IHT) liabilities, then speak to our financial planners. We will look at various ways to minimise your family’s tax liabilities using tax-efficient estate planning, trusts and insurance policies. Our team will carry out a review to help you organise your estate, so that your children only pay minimal IHT.

At Balance: Wealth Planning, we have the expertise to help you navigate family dynamics and conversations around tax-efficient wealth preservation. Our advice is to have those discussions sooner rather than later to take advantage of all available forms of tax relief. Together, we can help you hold onto your family wealth so it can be enjoyed by future generations.

If you would like advice on trusts and inheritance tax, get in touch to speak to our financial planners.