Using Trusts for IHT Planning

Key facts

Discretionary trusts remove assets from your estate, subject to entry, 10-year, and exit charges.
Loan trusts freeze the IHT value of the assets while allowing the settlor to recover their capital.
Bypass trusts (created by will) hold assets for the family while keeping them outside the surviving spouse’s estate.
Settling assets within the £325,000 NRB avoids the 20% entry charge.
Trust planning must be balanced against the periodic and exit charges that apply to relevant property trusts.

Why Use Trusts for IHT Planning?

Trusts can remove assets from your estate, freeze their value for IHT purposes, or direct them to beneficiaries in a tax-efficient way. While trusts involve their own IHT charges (entry, 10-year, and exit), these are typically much lower than the 40% death rate, making trusts a valuable planning tool for larger estates.^[1]

Discretionary Trust Planning

The most common trust-based IHT strategy involves settling assets into a discretionary trust during your lifetime:^[2]

The transfer is a CLT — if within the NRB (£325,000), no entry charge applies
If you survive 7 years, the CLT drops out of your cumulative total
The assets are outside your estate for IHT on death
Trustees can distribute to beneficiaries (including the settlor’s family) at their discretion

Example: David settles £325,000 into a discretionary trust in 2019. No entry charge (within NRB). He survives 7 years (to 2026). The NRB is refreshed. The £325,000 (plus growth) is entirely outside his estate. If the trust has grown to £450,000, only the 10-year charges (max 6%) apply — not the 40% death rate.

Loan Trusts

A loan trust is designed for people who need access to their capital but want future growth to fall outside their estate:

The settlor lends money to the trust (typically invested in an insurance bond)
The loan is repayable on demand, so it remains in the settlor’s estate at face value
Any investment growth belongs to the trust and is outside the estate
The settlor can withdraw regular amounts as loan repayments (reducing the estate value further)
No CLT arises because the settlor retains the right to repayment

Advantage: Unlike a gift into a discretionary trust, a loan trust does not use up the NRB and there is no 7-year waiting period. The IHT saving comes from the growth falling outside the estate, which compounds over time.

Bypass Trusts (Will Trusts)

A bypass trust is established by the first spouse’s will rather than during lifetime. It keeps assets outside the surviving spouse’s estate:^[3]

The first spouse’s will leaves assets (up to the NRB) into a discretionary trust
The surviving spouse can be a potential beneficiary of the trust
The trust assets are not part of the surviving spouse’s estate when they die
This uses the first spouse’s NRB immediately rather than relying on the transferable NRB

Comparing Trust Strategies

Feature	Discretionary Trust	Loan Trust	Bypass Trust
When created	Lifetime	Lifetime	On first death (will)
Entry charge?	Yes (CLT, 20% on excess over NRB)	No (loan, not a gift)	No (death estate, NRB applies)
7-year rule applies?	Yes	No	No
Settlor access to capital?	No (gift with reservation risk)	Yes (loan repayments)	N/A (settlor has died)
10-year/exit charges?	Yes	Yes (on growth element)	Yes
What is removed from estate?	Full value of gift	Growth only	Trust assets (first spouse’s NRB)

Other Trust Planning Approaches

Gift and loan trusts — a combination where part is a gift (using the NRB) and part is a loan
Discounted gift trusts — the settlor retains a right to fixed payments, reducing the CLT value
Pilot trusts — small trusts created on different days to preserve separate NRBs (less effective since June 2014 rules)
Bare trusts for minors — gifts to children/grandchildren held by trustees until the child reaches 18

Frequently Asked Questions

How does a discretionary trust reduce IHT?

Assets settled into a discretionary trust are removed from your estate. If you survive 7 years, the CLT falls out of the cumulative total and the NRB is refreshed. The trust then holds the assets outside your estate, though it is subject to 10-year periodic charges (max 6%) and exit charges on distributions.

What is a loan trust?

A loan trust involves lending money to a trust (usually invested in an insurance bond). The original loan is repayable on demand (so it stays in your estate at face value), but any investment growth belongs to the trust and falls outside your estate. Over time, the growth element can be substantial.

What is a bypass trust?

A bypass trust is created by the first spouse’s will. Instead of leaving everything outright to the surviving spouse, assets up to the NRB are placed in a discretionary trust. The surviving spouse can benefit from the trust, but the assets are not part of their estate when they later die.

Are trust charges worth the IHT saving?

Usually yes, for larger estates. The maximum 10-year charge is 6% (often much less), compared to the 40% IHT rate on death. Over a 20-30 year period, the cumulative trust charges are typically far less than the IHT that would have been payable if the assets had remained in the estate.

Sources

Trusts and Inheritance Tax — GOV.UK
IHTM42000 – Relevant property trusts — HMRC
Inheritance Tax: gifts — GOV.UK