Families throughout the United Kingdom are finding themselves ensnared by a significant inheritance tax trap, largely due to the long-standing freeze on the tax-free threshold. This financial pressure is prompting a notable shift in estate planning strategies, with a sharp increase in the number of individuals establishing trusts as a protective measure.
The Frozen Threshold and Its Impact
The inheritance tax nil-rate band has remained firmly fixed at £325,000 since 2009, a policy set to continue until at least 2030. This freeze, combined with steadily rising property values and the growth of personal asset portfolios, has resulted in a growing number of estates breaching the threshold. Consequently, more families than ever before are facing potential inheritance tax liabilities on assets they wish to pass on to their beneficiaries.
A Surge in Trust Registrations
Official figures reveal a clear upward trend in the use of trusts as a countermeasure. During the 2024-25 tax year, approximately 121,000 new trusts were registered across the UK, marking an increase from the 115,000 recorded in the previous year. This growth has contributed to a substantial total, with estimates suggesting there are now at least 825,000 active trusts nationwide.
Understanding Trusts and the Seven-Year Rule
A trust is a formal legal arrangement where assets are transferred to appointed trustees, who manage them for the benefit of named individuals or organisations. In the context of inheritance tax, one of the most powerful advantages stems from the so-called 'seven-year rule'.
When assets are placed into certain types of trusts and the settlor survives for at least seven years after the transfer, those assets are generally considered outside of their estate for inheritance tax calculations. This mechanism can significantly reduce the overall value of an estate subject to tax, offering a legitimate pathway for potential savings.
Expert Insight on Strategic Planning
Laura Whetstone, a Wealth Advisor at DS Burge & Co, provided detailed commentary on the strategic use of trusts. "When assets are transferred into certain types of trusts, they are typically considered outside the settlor’s estate for inheritance tax purposes," she explained. "This reduction in the estate’s value can significantly lower the inheritance tax liability, especially for estates that exceed the threshold."
She further emphasised that while trusts offer considerable flexibility and opportunities for tax planning, they are not a one-size-fits-all solution. "Trusts are valuable in inheritance tax planning, offering flexibility and opportunities for potential inheritance tax savings. They allow individuals to manage their assets during their lifetime and ensure a smooth transfer of wealth to their beneficiaries after death. However, trusts are not universally applicable; each individual’s financial situation and goals are unique."
Whetstone concluded by advising careful consideration. "Therefore, careful consideration must be given to the type of trust that best meets your needs, the responsibilities of the appointed trustees, and the potential tax implications involved."
The current fiscal landscape, characterised by the frozen threshold, is clearly reshaping how UK families approach intergenerational wealth transfer. The rising popularity of trusts underscores a proactive, though complex, response to navigating inheritance tax regulations and safeguarding assets for future generations.
