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20 September 2017 | Comment | Article by Eleanor Evans TEP

Using trusts for tax planning

When considering Inheritance Tax planning during your lifetime or on the death of a loved one, there are many ways that trusts can be used to assist in reducing your liability to Inheritance Tax. People are often put off using trusts because they believe that they are complex and/or costly, but the saving in tax can often outweigh the cost of set up and administration.

Life policies

On death a life policy normally forms part of your estate and is added to the other assets you own when calculating your liability to Inheritance Tax. Placing a life policy into trust during your lifetime can take the value out of your estate immediately for Inheritance tax purposes. The whole value of the policy is then paid into trust on your death and not into your estate thus reducing our liability to Inheritance Tax. Standard documents are often produced by insurance companies to place policies into trust but it can be helpful to get advice on your individual requirements in order to prepare a trust document for your particular needs.

Deeds of variation

On the death of a loved one an inheritance received can also mean that your own estate is then over the Inheritance Tax threshold. Whilst you may wish to have some benefit from the inheritance or to retain control of the funds during your lifetime, you may also be concerned with your own potential Inheritance tax liability. Instead of receiving the gift outright, within 2 years of the death and a deed of variation can be prepared to place the Inheritance into trust. As the trust is set up by the estate of the deceased the trust is not considered as your own as far as Inheritance Tax is concerned and does not use up your own Nil-rate band exemption. Thus the assets placed into trust will not be taxable on your own estate when you die, yet you have retained some measure of control over the assets and can potentially benefit from the trust during your lifetime.

Gifts into trust

Where you wish to reduce your own inheritance tax liability but do not wish to make outright gifts (e.g. if the beneficiaries are young or if you wish to retain control over who uses the asset and when) you can make a gift of assets into trust. Provided the gift is within your nil-rate band allowance (currently £325,000) there will be no immediate charge to inheritance tax and the assets will be outside of your estate for Inheritance Tax purposes after 7 years. Care must be taken when making outright gifts or gifts into trust to ensure these are documented and to ensure that the tax exemptions and reliefs are utilised.

Specialist advice should be sought in all of these situations. Whilst trusts can be an extremely useful tool it is also essential to get expert legal advice when setting up and administering trusts due to the regular changes to the rules of taxation and to ensure trusts are set up and run effectively.

Author bio

Eleanor Evans TEP


Eleanor is Head of the Trusts and Estates Administration Department, a large team dealing with estates and trusts administration on behalf of financial institution and trust corporation clients.  Eleanor is a specialist in wills, probate, tax and trusts, and is a full member of STEP (the Society of Trusts and Estates Practitioners).  She is also a committee member of the STEP Wales branch.

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