How Discretionary Trusts Can Cut Your IHT Bill and Protect Family Wealth
The use of trusts in Inheritance Tax planning
Over recent months, we’ve seen a significant rise in estate planning enquiries—driven by growing concerns around inheritance tax (IHT).
It’s not hard to see why. A ‘perfect storm’ of rising asset values, frozen nil-rate bands, and incoming tax changes is pushing more estates over the IHT threshold. From April 2026, Business Relief rules are due to tighten, and from April 2027, defined contribution pensions will be brought back into the IHT net.
In this week's blog, we're talking about discretionary trusts—one of the most flexible and practical tools in the IHT planning toolkit.
Our Estate Planning Process
When discussing IHT planning with clients, we typically adopt the following approach:
Calculate the potential IHT charge (often less than anticipated once factoring in combined nil-rate bands of up to £1 million for married couples)
Use cashflow modelling to gauge available 'surplus' (on conservative assumptions for growth, inflation and spending) to put towards IHT planning
Present the available IHT options - which typically fall into five main categories:
Direct gifts
Transfer into trust
Permanent life insurance
Business relief investments
Charitable donations
Each option has its respective pros and cons, and the exact choice or blend will depend on the client's personal preferences around control, risk, timescales, and flexibility.
The Financial Conduct Authority does not regulate Estate and Inheritance Tax Planning. Inheritance Tax thresholds depend on your individual circumstances and may change in the future.
How Discretionary Trusts Work
You transfer assets into a discretionary trust, which becomes a separate legal entity.
The rules of the trust are defined in a trust deed, which establishes three key parties:
Settlors (those who created the trust and transferred the cash in)
Trustees (often the same people as the settlors, sometimes with an added professional trustee to ensure seamless transition if something were to happen to the trustees)
Beneficiaries (most commonly the children and their children and any future issue)
There are two broad types of trust:
Bare Trust: The beneficiary is specifically defined (e.g. a specific child) and cannot be changed. Once the beneficiary reaches 18, they have absolute entitlement to the assets should they wish to withdraw from the trust.
Discretionary Trust: Much more flexible. Rather than naming particular individuals, you typically name a class of beneficiaries—any children, grandchildren, or future issue. The trustees can then distribute funds to any beneficiaries (within the named class of beneficiary) as they see fit, and when they see fit.
Chargeable Lifetime Transfers vs Potentially Exempt Transfers
One of the key technical differences between trusts and direct gifts is how the initial transfer is treated for inheritance tax.
A direct gift—whether to an individual or into a bare trust—is classed as a Potentially Exempt Transfer (PET). There’s no immediate tax to pay, and provided you survive seven years, the gift falls entirely outside your estate for IHT purposes.
With trusts, they're classed as chargeable lifetime transfers (CLT). This means you're generally limited to your available nil-rate band (typically £325,000 per person). Transfer more than this, and you'll incur an immediate lifetime charge of 20% on the excess.
However, once seven years have passed, your nil-rate band resets, and you can potentially make another chargeable transfer into trust.
The Benefits of Discretionary Trusts
Used well, discretionary trusts can deliver substantial IHT savings and enable the settlor (i.e. person(s) making the gift) to retain control:
1. Substantial IHT Savings
The key motivation for establishing discretionary trusts is the potential inheritance tax saving. Let's look at the numbers:
Here’s an example:
A couple transfers £650,000 into trust (£325,000 each)
After surviving seven years, this removes £650,000 from their estate
Providing an IHT saving of £260,000 (£650,000 × 40%)
But it gets better—any growth in assets sits immediately outside the estate.
Returning to the previous example:
Say the £650,000 transferred into trust has now grown to £775,000 after three years (implies 6% growth per annum)
The £125,000 growth is immediately outside the estate for IHT
This provides an immediate effective 40% saving on the growth: £50,000
This growth protection is a significant advantage over keeping assets in your personal estate where growth continues to increase your IHT liability.
When investing, your capital is at risk. The value of your investment (and any income from it) can go down as well as up, and you may get back less than you invested. The figures above are for illustrative purposes only and do not reflect actual investment returns, which can fluctuate and are not guaranteed.
2. Control, Control, Control
Beyond the tax benefits, control is the main reason you'd choose a trust over a direct gift.
Direct gifts are undoubtedly more cost-effective and tax-efficient—you can give as much as you want with no tax at the outset, no ongoing administration, and complete IHT relief after seven years. However, you give up all control.
You might not want a child in their teens or early twenties to have access to a substantial pot of money. You might have concerns about a current or future partner, or potential matrimonial issues. You might want to help future grandchildren whilst starting the seven-year clock now, rather than waiting for them to arrive.
Trusts provide that control. As trustees, you maintain discretion over who benefits (as long as they fall within the wide class of beneficiary names in the trust deed), when they benefit, and how much they receive.
3. More Straightforward than you Think
We often get pushback that trusts are too costly and complex. However, we subscribe to 'keep it simple, stupid'—we steer clear of fancy trusts with ongoing access and various bells and whistles, as these are generally unnecessary and come with added layers of costs.
Instead, we operate in the simple discretionary trust world:
Trustees = Settlors (generally)
Beneficiaries = Any child or future issue
Underlying investments are held in an offshore bond, which is a non-income-generating asset that enables trust income and gains to roll up without immediate tax charges (and no need to file tax returns)
This approach keeps costs and administration to a minimum.
…and the Drawbacks
1. Limited Entry Amount
You're restricted to the nil-rate band on entry (£325,000 per person). Transfer more, and there's an immediate 20% charge to pay.
2. Establishment Costs
There will be costs to establish and register the trust. We normally work with local law firms to ensure this is done correctly.
3. Loss of Access
Once you move money into trust, you generally no longer have access to it.
4. Added Complexity
We work hard to limit this, but trusts do add a layer of complexity compared to direct gifts.
5. Periodic and Exit Charges
Perhaps most significantly, after ten years (and on any subsequent distributions to beneficiaries), the trust falls subject to periodic and exit charges. Generally, these levy a 6% charge on growth above the nil-rate band.
For example, say Client A puts £325,000 into trust in January 2015, and it's now worth £525,000. They would face a 6% periodic charge on the £200,000 growth—so £12,000. That's not ideal, but it's considerably better than the 40% IHT that would apply if the money had stayed in the estate.
6. Tax Within the Trust
Investment income or gains within the trust incur tax at additional rates—45% on income and 24% on gains (above token allowances). However, these can generally be mitigated by holding an investment bond inside the trust and subsequently distributing via assignment (which warrants a blog of its own).
Case Study: The Austin Family
Kate and Jack Austin, both 55, have accumulated significant wealth—£2.5m in liquid assets and a £1.2m family home.
Cashflow modelling confirms they need around £1.8m to maintain their lifestyle through retirement, leaving a £700,000 surplus. However, their estate faces a potential IHT bill of £1.22 million, with their residence nil-rate bands tapered to nil due to the size of their estate.
They have two children—Claire (22) and Charlie (19)—and hope for grandchildren in future.
Their Concerns
Claire is financially sensible, but they feel a £300k+ gift now would be too much too soon
Charlie, still at university, has made a few questionable financial choices
They want to provide for future grandchildren, but don’t want to wait years to start the IHT clock
They're keen to protect gifted assets from potential relationship breakdowns
The Strategy:
Kate and Jack set up two separate discretionary trusts, one for each child (our preference—separate trusts allow for different future needs and family structures):
Trust 1 (earmarked for Claire and future issue): Jack settles £325,000
Trust 2 (earmarked for Charlie and future issue): Kate settles £325,000
Total transferred: £650,000
Beneficiaries: Claire, Charlie, and any future grandchildren
Trustees: Kate and Jack (plus a professional trustee for continuity)
Each trust invests in offshore investment bonds—chosen for simplicity and tax efficiency. These allow growth to accumulate without triggering tax charges or the need for ongoing tax reporting.
Immediate Benefits
£260,000 IHT saving if they survive seven years (£650,000 × 40%)
Immediate IHT protection on all future growth
Ongoing control: As trustees, Kate and Jack decide who benefits, when, and by how much
Future-proofed: Grandchildren are automatically included as beneficiaries
Short-Term Impact (3-year example)
After 3 years, say the trusts are worth £775,000 combined (implies 6% annualised growth after costs)
Growth of £125,000 is fully outside the estate for IHT
Implies an effective IHT saving of £50,000 (40%)
IHT Saving After Seven Years
After seven years, say the trust is now worth £975,000 (same 6% p.a. growth assumption).
Original transfer of £650,000 now fully outside estate: £260,000 saving
Growth of £325,000 also exempt: £130,000 saving
Total IHT saving: £390,000
10-Year Review (Hypothetical):
However, it’s prudent to note that the trusts would be subject to a periodic charge at the ten year mark (unless they were wound up before this).
At an assumed 6% growth, the trusts are worth approx. £1.16m combined
Growth above nil-rate bands: £510,000
10-year periodic charge (6% charge on growth): £30,600
Even after this, the net tax saving is still c. £330,000—a significant legacy enhancement for Claire, Charlie, and future generations.
The Bottom Line
Discretionary trusts aren't suitable for everyone, but they can be effective tools for those looking to remove assets from their estate whilst maintaining control and flexibility. They're particularly valuable when:
You have concerns about beneficiaries' financial maturity
You want to provide for future generations
You're looking to balance IHT efficiency with practical control
You have surplus wealth beyond your lifetime needs
The key is ensuring any trust structure aligns with your broader financial and family objectives. As always, proper planning and professional advice are essential to navigate the complexities and maximise the benefits.
Happy Thursday!
Kind regards,
George
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Regulatory Information
Blincoe Financial Planning Limited is an appointed representative of Sense Network Ltd, which is authorised and regulated by the Financial Conduct Authority. Registered in England & Wales (No. 14569306). Registered Office: Star Lodge, Montpellier Drive, Cheltenham, GL50 1TY.
Important Disclaimer
This blog is for general information only and is intended for retail clients. It does not constitute financial or tax advice, nor is it an offer to buy or sell any specific investment. Since I don’t know your personal financial situation, you should not rely on this content as tailored advice. While we aim to provide accurate and up-to-date information, we cannot guarantee that all details remain correct over time. We are not responsible for any losses resulting from actions taken based on this blog’s content.
