Can You Use Trusts to Reduce Inheritance Tax in 2026?

Inheritance tax continues to affect more families each year. With property values rising and thresholds fixed through the 2030/31 tax year (to 5 April 2031), estates that would have escaped taxation a decade ago now face a potential 40% charge.

Trusts are often mentioned as a solution, but the reality is more complex than many people assume. 

They can be powerful tools for reducing inheritance tax, but they’re not magic bullets that make tax disappear. Understanding how trusts function, what they can and can’t achieve, and which type might suit your situation is essential before making any decisions.

This guide examines trusts through the lens of inheritance tax planning in 2026, looking at what’s changed, what remains effective, and what you need to consider.

We will warn you that trusts are famously complex – so 

Why Inheritance Tax Matters More Now

Inheritance tax kicks in when your estate exceeds £325,000 (or up to £500,000 if leaving your home to children). For married couples, these allowances can combine to create a £1 million threshold. Everything above gets taxed at 40%.

These thresholds remain fixed through the 2030/31 tax year while property values keep rising. More families are being pulled into the inheritance tax net each year.

From 6 April 2027, pensions will also become subject to inheritance tax for the first time in most cases. So IHT planning strategies are becoming much more popular. 

What Trusts Do: The Basics

A trust is a legal arrangement where you transfer assets to trustees who manage them for the benefit of others. You can think of it as a container that holds money, property, or investments, with rules about who can benefit and when.

When you put assets into certain types of trust, they stop being part of your estate for inheritance tax purposes. 

The growth on those assets also falls outside your estate. That’s the basic mechanism behind using trusts for inheritance tax planning.

However, trusts come with their own tax rules. They’re not simply a way to sidestep inheritance tax without consequence. Most trusts face charges at various points, and understanding these is crucial.

Trusts Aren’t What They Used to Be for IHT

Trusts can still play a useful role in inheritance tax planning, but they are no longer a simple tax fix.

In the past, some trust arrangements could move value out of an estate with relatively limited ongoing tax friction. Over time, the rules have tightened and the trade-offs have become clearer. Today, many common trusts come with their own inheritance tax framework – including upfront, ten-year, and exit charges – as well as additional reporting and administration.

That does not mean trusts are pointless. It means the easy wins are fewer. Trusts tend to work best now when they support practical aims – control, protection, and long-term family planning – and any inheritance tax saving is treated as one part of a wider plan rather than the whole point.

Put simply, trusts can still reduce inheritance tax in the right circumstances, but they are no longer a one-size-fits-all answer, and the structure has to be chosen carefully to avoid costs and complexity outweighing the benefit.

Types of Trusts and Their Different Tax Treatment

Not all trusts are created equal when it comes to inheritance tax. Each type has distinct characteristics and tax implications.

Discretionary Trusts

These are the most flexible option. The trustees can decide who benefits from the trust and when, choosing from a class of beneficiaries you define. Your children might be the named beneficiaries, but the trustees control when and how much each receives.

For inheritance tax, discretionary trusts face three potential charges:

• Entry charge: If your gift exceeds £325,000 (after taking account of earlier chargeable transfers in the previous seven years), you face an immediate 20% charge on the excess
• Periodic charge: Every ten years, the trust faces a charge of up to 6% on the value above the nil-rate band
• Exit charge: When money leaves the trust, an exit charge may apply based on the trust’s history

These charges are lower than the 40% death rate, which is why discretionary trusts can still reduce overall inheritance tax. They also offer protection, keeping assets separate from beneficiaries’ estates in case of divorce or bankruptcy.

Bare Trusts

With a bare trust, the beneficiary has an absolute right to the trust assets once they reach 18. There are no periodic or exit charges, making them simpler from a tax perspective.

For inheritance tax, the assets are treated as belonging to the beneficiary from the outset, even while they’re a minor. The key change at 18 is that they can demand the assets and control them.

The downside is inflexibility. Once you name a beneficiary and transfer assets, you cannot change your mind.

Interest in Possession Trusts

These give a named beneficiary the right to income from the trust or to occupy a property held in trust. The capital belongs to the trust, but the beneficiary gets the benefit.

For inheritance tax, some ‘qualifying’ interest in possession trusts are treated as part of the life tenant’s estate, particularly where the interest arises on death or in certain protected categories like disabled person’s interests. 

Other interest in possession arrangements can fall under the relevant property regime instead, bringing periodic and exit charges similar to discretionary trusts.

Loan Trusts

These work differently. Instead of gifting money to the trust, you loan it. The trust invests the loan, and all growth falls outside your estate immediately.

The original loan remains part of your estate, so there’s no immediate inheritance tax saving. However, you can request repayment of the loan at any time, giving you access if needed. Repayments of the loan come back to you, so they don’t reduce your estate by themselves. 

The benefit is that all investment growth in excess of the outstanding loan is outside your estate. If you want to reduce your estate further, you’d typically spend repayments, gift them onwards, or consider waiving part of the loan, which has its own inheritance tax treatment.

This makes loan trusts attractive for people who want inheritance tax planning but aren’t ready to give up access to capital. The trade-off is that the tax saving builds more slowly than with an outright gift.

Discounted Gift Trusts

These combine elements of gifting with retained access. You transfer a lump sum to the trust but retain the right to fixed regular payments for life.

An actuary calculates the value of those future payments based on your life expectancy. That amount is immediately outside your estate – the “discount.” The remainder is a potentially exempt transfer that falls outside your estate after seven years if you survive.

For instance, if you’re 70 and in good health, you might transfer £500,000 to a discounted gift trust with a right to receive £20,000 annually. The actuary might value those future payments at £200,000. That £200,000 is immediately outside your estate, and the remaining £300,000 becomes exempt after seven years.

Read our article on the different types of trusts here.

The Seven-Year Rule and Why It Matters

When people talk about the seven-year rule, they usually mean this simple idea: if you give something away and live for seven years, it normally stops counting as part of your estate for inheritance tax.

Outright gifts to people (and gifts into a bare trust) usually follow this straightforward pattern. 

If you die within seven years, the gift can still be brought back into the inheritance tax calculation. If you live for seven years, it is normally ignored for inheritance tax.

Some gifts into trusts work differently. With many common trusts used for family planning – especially discretionary trusts – a large gift can trigger an inheritance tax charge straight away if it pushes you over the nil-rate band. 

The usual rate is 20% on the amount above the available nil-rate band. If you then die within seven years, there can be an extra charge so that the total tax on that gift moves towards the 40% death rate.

If a gift is brought back into account because you die within seven years, the tax rate can be reduced by taper relief after three years. The taper relief rates are:

• 3 to 4 years after the gift – 32%
• 4 to 5 years – 24%
• 5 to 6 years – 16%
• 6 to 7 years – 8%
• After 7 years – no inheritance tax on the gift

This is why timing matters. The earlier you plan, the more likely it is that gifts and trust planning achieve the intended inheritance tax outcome.

When Trusts Can Help

Trusts are most effective when you have specific goals beyond simply reducing inheritance tax. They work well when you want to:

• Provide for young beneficiaries who aren’t ready to manage money responsibly
• Protect assets from potential claims in divorce, bankruptcy or creditor action
• Maintain some control over how and when beneficiaries receive money
• Create a structure that survives multiple generations
• Ring-fence business assets or property while keeping them in the family

For straightforward inheritance tax reduction, direct gifts might achieve the same result with less complexity. 

Changes Affecting Trusts from April 2026

Business Property Relief (BPR) and Agricultural Property Relief (APR) have provided 100% relief from inheritance tax for qualifying business and farm assets. From 6 April 2026, a new allowance limits the amount of agricultural and business property that can receive these reliefs at 100%.

The allowance is £2.5 million, covering the combined value of qualifying property. Above this threshold, the relief rate drops to 50%, meaning an effective inheritance tax rate of 20% rather than 40%. The allowance can be transferred between spouses and civil partners.

What About Life Insurance in Trust?

One straightforward use of trusts involves life insurance. If you own a life insurance policy in your own name, the payout forms part of your estate when you die.

By placing the policy in trust from the outset, the payout is usually kept outside your estate for inheritance tax and can be paid to beneficiaries without waiting for probate.

Premiums paid into the trust are technically gifts, though they’re often covered by exemptions like the annual allowance. For protection policies with no cash value during your lifetime, there are typically no periodic or exit charges in practice. This makes insurance trusts one of the simpler and more effective planning tools.

When Professional Advice Becomes Essential

Trusts are not DIY territory. The legal requirements for setting them up correctly, the tax consequences of getting the structure wrong, and the ongoing compliance obligations all require professional input.

Different professionals play different roles in trust planning:

• Chartered accountants or tax advisers can help you understand whether trusts genuinely benefit your situation or whether simpler approaches would work better. They can model different scenarios, showing you the actual tax savings versus the costs and complexity.
• Solicitors draft the trust deeds and ensure the legal structure matches your intentions. They handle the technical legal requirements and make sure the trust is set up correctly.
• Financial advisers can help with suitable investments for trust funds and ongoing management. They ensure the trust assets are invested appropriately for the beneficiaries’ needs.

So, When Are Trusts Still Worthwhile For IHT?

Trusts can be a good tool for inheritance tax (IHT) planning in 2026 – but usually not because they “make IHT disappear”. 

They’re most useful when you want to reduce IHT and solve a practical family problem at the same time, like protecting money for young children, keeping assets safe from divorce or creditors, or stopping wealth being taxed again in the next generation.

The table below shows the most common situations where trusts are genuinely worth considering for IHT – and what to watch out for.

The Bottom Line on Trusts and Inheritance Tax

Yes, trusts can reduce inheritance tax in 2026, but they’re tools with specific uses rather than universal solutions.

They work best when combined with other planning methods and when they serve purposes beyond tax reduction. Professional help is vital.

How Double Point Can Help

At Double Point, we specialise in helping families understand and manage their tax position, including inheritance tax planning.

Our team of chartered accountants can review your current situation, explain your options clearly, and work with you to develop a strategy that makes sense for your circumstances.

We work alongside solicitors and financial advisers to ensure all aspects of your planning fit together properly. Whether you need help understanding how trusts might work for you, or you’re looking for simpler approaches to reduce your inheritance tax liability, we can provide the guidance you need.

For a consultation about your inheritance tax position and whether trusts could benefit your family, get in touch with Double Point today.

Disclaimer

Disclaimer: This article provides general information about inheritance tax and trusts for educational purposes only. It does not constitute financial, tax or legal advice. Inheritance tax rules are complex and change regularly. Your individual circumstances will affect what’s appropriate for you. Double Point is not authorised to provide regulated financial advice. Before making any decisions about trusts or inheritance tax planning, you should seek professional advice from a qualified solicitor, tax adviser or regulated financial adviser. The information in this article is correct as of January 2026 but may become outdated as legislation changes.