For groups such as internationally mobile families, and indeed domestic UK ones, the role of trusts needs a reappraisal. They still have their uses, regardless of all the changes made by recent administrations.

Is now a good time to have a fresh think about trusts? Arguably, they are still useful for internationally mobile families. For UK resident families they can now settle into the trust before April 2026, assets which in the future will be restricted by inheritance tax changes. People must also decide in the future whether they want the uncertain timing of a 40 per cent IHT charge when someone dies vs a known 6 per cent charge every 10 years. A lot of trustees like the certainty of the latter as the timing is known.

We know that these are complex issues – this news service has also examined the use, or rather the under-use, of life insurance for paying potential tax bills such as IHT. 

The author of the following article is Liz Cuthbertson, partner at law firm Mercer & Hole. We hope readers find these views interesting; the usual editorial disclaimers apply. To comment, email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

Without careful planning family wealth can be eroded in unexpected or sudden circumstances. These could include claims on assets in a relationship breakdown, reckless spending, or a forced sale of assets to pay tax due on a death.  

Trusts have long been used for asset protection with trustee ownership and governance of the wealth whilst also providing flexibility over who should benefit from it over the long term. There are valuable tax benefits in the right circumstances.  

The dilemma for many parents is the desire to give wealth to the children but concern with loss of control over that wealth. A parent may want to help a young adult child get on the property ladder. The parent might be able to afford to make an outright gift of a cash sum to help them buy the property, but the parents want to ensure that their wealth is preserved and is not put at risk by future unforeseen events, for instance if a child divorces or dies.  

The parents could settle their funds on to a discretionary trust to enable the trustees to purchase the property. In this case, the trustees own and control the asset. The trustees can allow the child to occupy it, but the child has no control over it. If the child later no longer wants to occupy the property, the trustees can choose what to do with it including letting it or selling it, whatever is considered to be in the best interests of all beneficiaries.  

The gift of cash to trust reduces the donor’s (person making the gift) estate for IHT purposes provided the donor(s) survives seven years from the date of the gift. Each parent can make a gift to trust up to their available nil rate band for IHT i.e. £325,000 ($438,895) without incurring a tax charge on the transfer. If they have made other lifetime gifts in any of the seven preceding years, these will reduce the sum they can gift. The donors (the parents) need to be fully excluded from benefit so that the trust assets do not remain in their own estate for IHT purposes. Demonstrating overall affordability to give away part of their wealth is vital, and cash flow modelling can be helpful here.  

The gift to trust can be repeated every seven years based on the donor’s available nil rate band. Over time, this can be a very effective way of reducing the donor’s own estate for IHT purposes and therefore the amount of IHT payable on death. 

Assets for settlement are often cash or assets specifically to be ‘kept in the family’. This can include shares in a family business. A key concern is often the potential sale of shares to someone outside of the family if a shareholder leaves their shares directly to a family heir who is uninterested in the business.  

Shares or assets in a family business may qualify for Business Property Relief (BPR) or Agricultural Property relief (APR). The relief reduces the value of the asset in many cases to nil and so significant wealth can potentially be settled without a tax charge on entry to trust. Recent announcements will bring restrictions to this, but qualifying assets can be transferred to a trust without restriction of value up to 5 April 2026. After that date there will be an aggregate limit of £1 million of qualifying assets every seven years. Consequently, it is worth considering, as soon as possible, what overall assets you may have and whether any qualify for these reliefs, in order to take steps to protect this wealth before the proposals to change the rules come into effect.  

A discretionary trust has its own tax regime and trustees pay tax accordingly.   

A trust is subject to IHT every 10 years with 10-yearly periodic charges. The 10-year charge is up to 6 per cent of the chargeable value of assets on every tenth anniversary. Although this requires liquidity to pay it, trustees can plan in advance for that event rather than the uncertainty of timing on a person’s death. There is also an IHT charge when capital leaves the trust. The exit charge is a charge of between 0 and 6 per cent on the value of capital leaving the trust, for example when capital distributions are paid to a beneficiary. 

If the trustees receive income, they pay income tax at the top rate of income tax on that. However, income tax paid by trustees goes into a trust income tax pool and this can be used to reduce income tax paid by a beneficiary on receipt of any income distribution.

Grandparents often help with the payment of school fees. Distributions of income for the benefit of a grandchild with little or no other income can be very tax efficient because income tax paid by the trust may cover some or all of the tax for the beneficiary.  

If the trust realises capital gains on sale or disposals of assets, the trustees are chargeable to CGT on their annual net gains. CGT is a transaction-based tax and trustees take investment advice over whether or not to realise gains in a year. 

It is also possible to defer the CGT where assets are disposed of by distribution to a beneficiary. The CGT can be deferred until a later date, usually on the sale of the asset by the beneficiary. This enables assets to be appointed to beneficiaries without CGT leakage in the trust, which helps preserve the trust’s value for the wider beneficiaries. 

New rules from 6 April 2025 now mean that inheritance tax on foreign assets is determined by the long-term residence status (LTR) of an individual rather than their domicile. Often a UK resident has non-UK resident parents. If and whilst the parent is not a long-term resident of the UK, they can settle foreign wealth into a trust without UK tax charges. If the settlor or settlors do not become LTR of the UK, their foreign wealth is not in scope of IHT on their death. It is also outside the scope of IHT charges for the trustees even if the non-resident settlor can also benefit from it provided the trust does not own any UK assets. 

Non-UK resident parents with an adult UK resident child may wish to explore transfer of some of their foreign wealth to a trust for the benefit of the child and the next generation rather than risk it passing directly to the child in the event of the parent’s death which increases the child’s own potential IHT exposure if they become or remain LTR in the UK. Advice would also be required in the other jurisdiction to establish the appropriate overall arrangement. 

In the right circumstances, trusts can provide very wide-ranging long-term benefits for a family by safeguarding family wealth and enabling the benefit of it to be enjoyed by current and future generations to come.