IHT Trust Planning UK: Which Trust Reduces Inheritance Tax and When to Use Each (2026)
Trusts are powerful IHT tools — but the wrong structure costs the RNRB (up to £70,000 per person). Discretionary trusts maximise flexibility but attract periodic and exit charges and lose the RNRB. IPDI trusts protect the RNRB and carry no periodic charges. Bare trusts are the most IHT-efficient for outright gifts. Loan trusts and DGTs freeze or discount estate values.
| Trust Type | IHT on Creation | Periodic/Exit? | RNRB? | Best For |
|---|---|---|---|---|
| Bare trust | PET (7yr clock) | None | N/A (no home in bare trust normally) | Outright gifts to individuals; grandchildren |
| IPDI will trust (s49A IHTA 1984) | Spousal exemption on death (no IHT) | None (qualifying IIP) | PRESERVED — applies on life tenant's death | Spouse protection will; home to children with RNRB |
| Discretionary trust — lifetime CLT | CLT: 20% IHT above NRB | Yes — periodic s64 (up to 6%/10yr); exit s65 | LOST if home in trust | Flexibility; asset protection; estates >£2m (RNRB tapered) |
| Discretionary will trust (created on death) | No extra entry charge — part of death estate | Yes — periodic + exit from date of creation | LOST if home in trust | Post-death flexibility; large estates |
| NRB discretionary trust (old technique) | NRB sum to trust; no IHT (within NRB) | Yes — periodic + exit (but NRB deduction) | LOST if home in trust (up to £70k IHT cost) | Largely superseded by transferred NRB (s8A IHTA) — avoid for homes |
| Loan trust | No gift — loan; no IHT entry charge | No (loan is not a gift; trust is outside estate for growth) | N/A | Freezing estate; excluding growth |
| Discounted Gift Trust (DGT) | Discount immediately exempt; remainder CLT/PET | Depends on underlying structure (CLT if disc. trust) | N/A | Older settlors; discount + 7yr clock |
| Spousal bypass trust (pension nomination) | Pension nomination — no IHT (pre-April 2027) | N/A — trust funded by pension | N/A | SIPP/drawdown nomination pre-April 2027 |
2026/27. Relevant property regime (s58 IHTA 1984): discretionary trusts. Periodic charge: s64 IHTA 1984 (10yr; up to 6%). Exit charge: s65 IHTA 1984 (proportional; quarters/40). IPDI trust: s49A IHTA 1984 (qualifying interest in possession; in life tenant's estate; RNRB preserved). Bare trust: no periodic/exit; PET on creation. Loan trust: loan in estate; growth outside. DGT: immediate discount + CLT/PET. Pension bypass trust: spousal bypass without pension in spouse's estate (pre-April 2027).
IHT Trust Planning: Complete Guide
Why the trust structure matters for IHT — the RNRB warning
The choice of trust structure is not just a legal formality — it determines whether the RNRB applies (up to £175,000 per person) and whether IHT periodic and exit charges arise. The most common and costly mistake: placing the family home into a discretionary trust under the will. This triggers the relevant property regime (s58 IHTA 1984) and eliminates the RNRB for the home — converting a potential £0 IHT outcome into up to £70,000 of IHT on the RNRB-qualifying portion. For couples, the RNRB loss is up to £140,000 (both RNRBs lost). This mistake is embedded in thousands of older wills written before the RNRB was introduced in 2017, when NRB discretionary trusts were the standard technique for using both spouses' NRBs. Now that the transferred NRB (s8A IHTA) is available, most couples do not need an NRB discretionary trust at all — and the home should pass directly to children (not to the trust) to preserve the RNRB. Before implementing any trust strategy: verify that the proposed trust does not cost the RNRB; check whether periodic and exit charges will arise; confirm the trust type matches the underlying planning goal (protecting assets vs freezing IHT vs flexibility).
Bare trusts — the simplest, most IHT-efficient trust structure
A bare trust is a trust where the beneficiary (or beneficiaries) have an immediate, absolute interest in the trust assets. IHT treatment: (1) The gift of assets into the bare trust is a Potentially Exempt Transfer (PET — s3A IHTA 1984): IHT-free after 7 years from the date of the gift; (2) No periodic charges (10-year anniversary charges) and no exit charges — bare trusts are not within the relevant property regime; (3) The assets are treated as owned by the beneficiary for IHT (they form part of the beneficiary's estate — not the settlor's). Common uses: gifts to minor children or grandchildren (where they cannot hold legal title until 18); AIM BPR portfolios held for a named beneficiary; gifts where the donor wants some administrative control but not ongoing discretion. Limitations: the beneficiary cannot be changed; the beneficiary has an absolute right to the assets from age 18 and can demand them at any time; bare trusts provide no asset protection against beneficiary insolvency or divorce. CGT: the creation of a bare trust is treated as a gift to the beneficiary for CGT — a disposal at market value (s17 TCGA 1992). Holdover relief (s165 or s260 TCGA) is not available for bare trusts because the gift is a PET (not a CLT). Income tax: the parental settlement rule applies to bare trusts settled by a parent (income attributed to parent if >£100/yr); does NOT apply to grandparent-settled bare trusts.
IPDI trusts (s49A IHTA 1984) — the RNRB-friendly trust for spouse protection
An Immediate Post-Death Interest (IPDI) trust (s49A IHTA 1984) is a trust created in a will where the life tenant is given an immediate interest in possession from the moment of death. IHT treatment: (1) The trust assets are treated as part of the life tenant's estate for IHT — not the settlor's (post-death); (2) The RNRB is PRESERVED: where the home is in an IPDI trust for the surviving spouse as life tenant, and the remainder passes to direct descendants (children), the RNRB applies on the life tenant's death (not the testator's death); (3) No periodic or exit charges — IPDI trusts are not within the relevant property regime (they are 'qualifying interests in possession' under s59 IHTA 1984); (4) The spousal exemption (s18 IHTA) applies on the testator's death for an IPDI trust for the spouse — no IHT on the testator's death. Use case: the IPDI trust is the standard IHT-efficient structure for a 'life interest will' — the surviving spouse has the right to live in the family home for life, but the home passes to children on the spouse's death, with the RNRB applying on the spouse's death. This combines asset protection for the surviving spouse (protecting the home from care home means testing and future relationships) with RNRB efficiency. Contrast: a discretionary trust of the home (where children are only discretionary objects) loses the RNRB — the IPDI trust structure avoids this.
Discretionary trusts — maximum flexibility but RNRB lost and charges apply
A discretionary trust is the most flexible trust structure — trustees have full discretion over which beneficiaries receive what, and when. IHT treatment under the relevant property regime (s58 IHTA 1984): (1) Entry charge (CLT): gifts into a discretionary trust during lifetime are Chargeable Lifetime Transfers (CLTs). IHT at 20% on the amount above the NRB at the date of the CLT (with any CLTs in the previous 7 years reducing the available NRB). Gifts into a discretionary trust in the will do not attract an entry charge (no IHT on death creation of a discretionary trust — it is assessed as part of the estate); (2) Periodic charge (s64 IHTA): at each 10-year anniversary of the trust, a charge of up to 6% applies on the value of the trust fund above the NRB (the formula: effective rate × 30% × trust fund). The 6% is a maximum — the actual rate depends on the notional effective rate and the trust's history; (3) Exit charge (s65 IHTA): when assets are distributed from the trust to a beneficiary, an exit charge applies at a rate based on the last periodic charge rate (or the hypothetical rate if before the first 10-year anniversary). The exit charge is proportional to the number of complete quarters since the last periodic charge (or since the trust was created if before the first 10yr); (4) RNRB LOST: where the home passes into a discretionary trust under the will, the RNRB does not apply — the home is not passing to a 'direct descendant'. This can cost up to £70,000 IHT per person (the RNRB value at 40%). Discretionary trusts are most suitable where: the beneficiaries are not yet identified; asset protection (divorce, insolvency) is a priority; flexibility to respond to changing tax laws is needed; or the estate is above the RNRB threshold (>£2m, so RNRB is tapered away anyway).
Loan trusts and Discounted Gift Trusts — freezing and discounting IHT
Loan trust: the settlor lends (rather than gives) a sum to the trustees. The loan is an asset of the settlor's estate for IHT — it does not reduce the estate. But the trust fund can grow outside the estate — any growth (investment returns) is outside IHT. The settlor can request repayment of the loan during their lifetime. On death: the outstanding loan balance is an asset of the estate (not exempt from IHT), but the trust fund growth accumulated above the loan balance is outside the estate. Use: 'freezing' the IHT exposure at the loan amount while excluding future growth. No IHT entry charge (the loan is not a gift). Discounted Gift Trust (DGT): a more complex product where the settlor makes a gift into an irrevocable trust but retains the right to regular withdrawals (an 'income stream' — technically a retained right). The actuarial value of the retained withdrawals is a 'discount' — this amount is removed from the settlor's estate immediately on creation (it is not a PET or a CLT — it is an immediately exempt transfer because it is a gift of the non-retained element). The remaining trust fund is a CLT (if discretionary trust) or PET (if bare trust). The full trust fund exits the estate after 7 years from the CLT element (if any). The discount depends on actuarial calculations based on age and health — older/less healthy settlors have larger discounts. DGTs are marketed as a way to make gifts to the next generation while retaining income.
Frequently Asked Questions
Which trust is best for reducing inheritance tax?
It depends on the objective: (1) For outright gifts that exit the estate after 7 years with no ongoing IHT charges: bare trust (PET) or direct gift; (2) For spouse protection with RNRB preserved: IPDI will trust (s49A IHTA 1984) — home to spouse as life tenant, remainder to children; RNRB applies on spouse's death; (3) For maximum flexibility post-death: discretionary trust — but RNRB is LOST if home in trust (up to £70k IHT cost per person); only use where estate is above £2m (RNRB tapered away) or flexibility outweighs RNRB cost; (4) For freezing estate IHT while excluding future growth: loan trust; (5) For immediate discount + 7yr clock: Discounted Gift Trust. The RNRB is the most important consideration for most UK estates — avoid any trust structure that would cost it without a compelling reason.
Does putting property in a trust avoid inheritance tax?
It depends on the trust type and the property: (1) Bare trust — gift of property into bare trust is a PET. IHT-free after 7 years. No periodic or exit charges. But CGT arises on the gift at market value (no holdover relief for PETs); (2) IPDI trust for spouse — home passes to IPDI trust for spouse (RNRB preserved; spousal exemption applies; no IHT on creation); (3) Discretionary trust — gift into discretionary trust is a CLT. Entry charge at 20% above the NRB. RNRB LOST if home in trust. Periodic and exit charges apply. Simply putting property in a trust does not avoid IHT — the choice of trust type, the 7-year clock (for lifetime gifts), and the RNRB interaction all matter.
What is an IPDI trust and how does it help with IHT?
An IPDI (Immediate Post-Death Interest) trust (s49A IHTA 1984) is a will trust where the surviving spouse receives an immediate right to income or occupation of trust assets from the date of death. IHT benefits: (1) Spousal exemption (s18 IHTA) applies on the testator's death — no IHT on creation; (2) RNRB preserved — the home can sit in an IPDI trust for the spouse; the RNRB is claimed on the spouse's death (not the testator's), when the remainder passes to direct descendants; (3) No periodic or exit charges — IPDI trusts are not within the relevant property regime; (4) Asset protection: the surviving spouse cannot gift or sell the home (it is trust property) — protection from a new relationship or care home means testing. IPDI trusts are the standard modern technique for life interest wills combining spouse protection with RNRB efficiency.
Do discretionary trusts have IHT charges?
Yes — discretionary trusts are within the relevant property regime (s58 IHTA 1984): (1) Entry charge (lifetime CLT): 20% IHT on gifts above the available NRB; (2) Periodic charge (s64 IHTA): at each 10-year anniversary, up to 6% on the trust fund value above the NRB. Formula: notional effective rate × 30% × fund value; (3) Exit charge (s65 IHTA): when assets leave the trust, a charge based on the periodic rate × complete quarters since last anniversary (divided by 40). A discretionary will trust created on death has no entry charge (the estate IHT is assessed separately) but periodic and exit charges apply from the date of creation. Key risk: if the home goes into a discretionary trust, the RNRB is lost (potentially costing £70,000+ in IHT) — often outweighing any flexibility benefit.
What is a spousal bypass trust?
A spousal bypass trust is a discretionary trust nominated as the beneficiary of a pension (SIPP, drawdown, DC scheme) instead of the surviving spouse directly. Purpose: rather than the pension passing to the spouse and then sitting in the spouse's estate (subject to IHT on the spouse's death), the pension lump sum (currently outside IHT for most death-before-75 or drawdown designations — until April 2027) passes to the trust and is managed by trustees for the benefit of the spouse and family. The spouse can benefit from the trust (income, discretionary capital payments) without the trust assets forming part of the spouse's estate. Important: from 6 April 2027, DC pension funds enter the IHT estate — a spousal bypass trust may be more complex post-reform. Current nominations (pre-2027) should be reviewed in light of the Budget 2024 pension IHT changes.
Get the Trust Structure Right in Your Will
The difference between an IPDI trust and a discretionary trust for the family home can be £70,000 in IHT. WillSafe will kits for England and Wales include life interest trust provisions and guidance from £39.99. For complex trust arrangements, we recommend specialist solicitor advice.
View Will Kits from £39.99