Inheritance tax (IHT) continues to affect more families each year.
As we highlighted in our recent blog, Gifting out of Surplus Income[1], IHT receipts rose by 7% in the 2023/24 tax year and current forecasts suggest a further 5%+ increase this year. This is largely driven by rising asset values and frozen thresholds dragging more estates into the IHT net.
To make matters worse, major changes to pension legislation are looming. From April 2027, pension savings will form part of an individual’s estate for IHT purposes. For many, this could result in a significant and unexpected tax bill.
In light of this, we’re having more and more conversations about Nil-Rate Band (NRB) Trusts—a proven and flexible tool for managing IHT and protecting family wealth across generations.
Note, the Financial Conduct Authority does not regulate Inheritance Tax Planning. Inheritance Tax thresholds depend on your individual circumstances and may change in the future.
What Is the Nil-Rate Band?
The Nil-Rate Band is the amount each individual can leave to beneficiaries free of IHT. It currently stands at £325,000.
Any assets above this could be taxed at 40%, unless they qualify for specific reliefs or exemptions, such as:
- Residence Nil-Rate Band – Up to £175,000 extra allowance when passing a home to direct descendants
- Business and Agricultural Relief – Potential exemptions for certain types of property and business assets
- Spousal Exemption – Transfers between spouses or civil partners are exempt from IHT
- Charitable Donations – Bequests to registered charities can also reduce the taxable estate
In the vast majority of cases, spouses will leave everything to each other on first death.
This is logical. Under the spousal exemption, there’s no IHT to pay at this stage—the entire estate can pass to the surviving spouse tax-free. In addition, any unused Nil-Rate Band (NRB) also transfers across, potentially doubling the survivor’s allowance to £650,000.
But while this approach defers tax, it can introduce two key problems later on:
- Estate Bloat – Assets may continue to grow in the survivor’s estate, increasing their eventual IHT bill.
- Loss of Control – The deceased has no influence over what happens next. If the survivor remarries and is later outlived by their new spouse, there’s a real risk the children could be disinherited.
This is where the Nil-Rate Band Trust can offer a smarter, more protective alternative.
NRB Trust: How it Works
Rather than leaving the entire estate to the surviving spouse, a more strategic approach is to direct an amount up to the available Nil-Rate Band—typically £325,000—into a discretionary trust.
Importantly, the available NRB may be reduced by any non-exempt gifts made within the seven years prior to death. These are taken into account when calculating how much can be settled into trust without incurring IHT.
The trust itself is usually established during your lifetime—via a trust deed—but is provisioned for in your Will and therefore only funded on first death. In other words, the structure is created now, but lies dormant until activated by your estate plan.
The trust beneficiaries would normally be a broad class, typically including:
- Your surviving spouse or civil partner
- Your children
- Your grandchildren
- Any future descendants (or “issue”)
This flexible approach gives the trustees the ability to manage distributions in line with your wishes, while ensuring the capital remains outside the taxable estate of the survivor—and of the beneficiaries too.
The Benefits
At the outset, this strategy is broadly tax-neutral. Assuming the deceased had their full Nil-Rate Band available, settling £325,000 into trust reduces the surviving spouse’s estate by that amount—but they also forgo the transferable NRB. On paper, it’s a zero-sum game.
However, the play is that any subsequent growth on the trust assets is fully and immediately outside the surviving spouse’s estate—and therefore exempt from IHT. Had those same funds been passed directly to the spouse, the growth would remain inside their estate and potentially attract 40% tax later on.
Consider the following example.
Case Study: Jack and Kate
Jack and Kate, both 75, have a joint estate of £3 million.
- When Jack passes away, he settles £325,000 into a discretionary trust for the benefit of Kate, their children, and grandchildren. This is covered by his NRB and therefore does not incur any IHT on first death.
- Kate lives for another 10 years, during which the trust grows to £525,000 (5% growth per year after costs).
- That £200,000 gain is completely outside Kate’s estate, saving £80,000 in IHT (40% IHT vs £200,000 growth).
- Kate can access the funds if needed, ideally via loans from the trust to prevent re-entry into her estate. Meanwhile, Jack’s expression of wishes can guide trustees, helping protect against the risk of disinheritance—e.g. if Kate were to remarry.
How to Set One Up
The process is straightforward:
- Speak to a solicitor – They’ll draft the trust deed and update your Will accordingly.
- Appoint trustees – Usually a mix of family and professional trustees.
- Define your wishes – A detailed Letter of Wishes can guide how funds are to be used.
Key Considerations
- Trusteeship – Choose people you trust to act in line with your wishes.
- Administration – Trusts require annual record-keeping and potentially tax filings. Your accountant or solicitor can handle this.
- Periodic/Exit Charges – Trusts may be subject to IHT charges every 10 years or when assets are distributed. However, these are typically levied at 6% on the growth of the trust assets, which is modest in the context of the 40% IHT saving.
Summary
A Nil-Rate Band Trust can offer significant Inheritance Tax savings, while also protecting your family’s long-term interests. Although initially tax-neutral, any growth on the trust assets sits outside the surviving spouse’s estate—potentially saving tens of thousands in IHT over time.
The structure offers flexibility too. The surviving spouse can still access funds if needed—usually via loans from the trust—while the original intentions for the money are safeguarded through a well-drafted expression of wishes.
With IHT thresholds frozen and significant changes to pension rules on the horizon in 2027, the case for proactive estate planning has never been stronger.
Happy Thursday!!
Kind regards,
George
