Inheritance Tax Freeze Drives Surge in Trust Registrations
With inheritance tax thresholds frozen and house prices continuing to climb, a growing number of British families are finding themselves unexpectedly liable for substantial tax bills upon death. In response, many are adopting a straightforward legal strategy involving trusts that could shield thousands of pounds from HM Revenue & Customs.
Official data from HMRC reveals a significant uptick in trust registrations, with approximately 121,000 trusts established in the 2024-25 tax year alone. This marks an increase from 115,000 the previous year, bringing the total number of trusts operating across the United Kingdom to at least 825,000.
The Frozen Threshold and Its Consequences
The inheritance tax nil-rate band has remained static at £325,000 since 2009, with the government confirming it will stay at this level until at least 2030. Had this threshold been adjusted in line with inflation over the past decade and a half, it would now stand at around £500,000.
This freeze, combined with soaring property values and appreciating asset portfolios, has dragged countless additional estates into the inheritance tax net. Inheritance tax is typically levied at a rate of 40% on the portion of an estate exceeding the threshold, though this can be reduced to 36% if at least 10% of the estate is bequeathed to charity.
The Treasury projects that inheritance tax receipts will reach £14.5 billion annually by the 2030-31 financial year, underscoring the growing fiscal impact on families nationwide.
How Trusts Leverage the Seven-Year Rule
A trust is a formal legal arrangement where assets are transferred to trustees who manage them for the benefit of designated beneficiaries. These assets can encompass cash, real estate, shares, land, and valuable personal items such as jewellery and artwork.
The central mechanism for inheritance tax avoidance within trusts revolves around a straightforward seven-year rule. According to government guidelines, if the individual establishing the trust (known as the settlor) survives for at least seven years after transferring assets into the trust, those assets are generally excluded from the value of their estate for inheritance tax purposes.
"When assets are placed into specific types of trusts, they are typically removed from the settlor’s estate for inheritance tax calculations," explains Laura Whetstone, a Wealth Advisor at DS Burge & Co. "This reduction in the estate’s overall value can substantially lower the potential inheritance tax burden, particularly for estates that surpass the frozen threshold."
Important Tax Considerations and Charges
It is crucial to understand that utilising a trust does not guarantee complete tax exemption. If assets valued above the £325,000 threshold are transferred into certain trust structures, an immediate 20% inheritance tax charge may be applicable. Furthermore, periodic charges can arise every ten years, and additional taxes may be due when assets are eventually distributed out of the trust to beneficiaries.
Setting Up a Trust: A Step-by-Step Guide
Establishing a trust requires careful planning and adherence to legal procedures. The process involves several key stages:
- Select the Appropriate Trust Type: The UK offers various trust structures, each suited to different needs:
- Bare Trust: Assets are held for a beneficiary who gains access at age 18 (or 16 in Scotland).
- Interest in Possession Trust: The beneficiary receives income from the trust during their lifetime, with the capital passing to others thereafter.
- Discretionary Trust: Trustees have the discretion to decide which beneficiaries receive payments and when.
- Life Insurance Trust: Often used to exclude life insurance payouts from the estate for inheritance tax purposes.
- Trusts for Vulnerable Persons: Designed to safeguard funds for children or individuals unable to manage their own finances.
- Appoint Trustees: Choose responsible individuals or professional entities, such as solicitors or accountants, to manage the trust. A combination of family members and professionals is common.
- Draft the Trust Deed: This legal document outlines the trust's purpose, identifies the trustees and beneficiaries, and establishes the rules for asset management and distribution.
- Register with HMRC: Registration on the Trust Registration Service is mandatory if the trust generates taxable income, realises capital gains, or holds assets exceeding £100. Upon registration, a unique trust registration number is issued for tax filing purposes.
Maintaining accurate records and fulfilling tax obligations is essential, as HMRC can impose penalties for non-compliance. Given the complexity of trust establishment and management, seeking professional financial or legal advice is strongly recommended.
"Trusts are invaluable tools in inheritance tax planning, providing flexibility and opportunities for significant tax savings," states the DS Burge & Co website. "They enable individuals to manage assets during their lifetime and ensure a seamless transfer of wealth to their chosen beneficiaries after death. However, trusts are not a one-size-fits-all solution; each person's financial circumstances and objectives are distinct."
Therefore, meticulous consideration must be given to selecting the most suitable trust type, understanding the duties of appointed trustees, and evaluating all potential tax implications before proceeding.
