Are Trusts Still the Best Tool for Inheritance Tax Planning?

Trusts are often seen as the gold standard for inheritance tax planning—but are they really the most effective or efficient tool? In this article, we unpack the hidden costs, common pitfalls, and smarter alternatives for high-net-worth families.

Trusts for IHT: Effective Planning or Expensive Myth?

When it comes to Inheritance Tax (IHT) planning, one word often gets thrown around like confetti: trusts. For decades, they’ve been the default recommendation for families worried about IHT. But in reality? They’re not always the magic solution they’re made out to be.

Let’s unpack why trusts often fall short of expectations—and what might work better.

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The Allure of the Trust

There’s no denying that trusts can offer serious advantages: control, asset protection, and in some cases, tax savings. They can ringfence wealth, avoid probate delays, and set out long-term wishes with clarity.

But when it comes to cutting your IHT bill, the picture is more complicated—and less appealing (particularly since changes in the law in 2006)—than many realise.

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The Hidden Costs of Trust Planning

At first glance, putting money into a trust sounds simple. But trusts aren’t free, and the costs—both financial and administrative—can be considerable:

• Setup fees from solicitors or estate planners.

• Annual trustee charges (especially with professional trustees).

• Tax compliance costs, such as trust tax returns (SA900s).

• Investment fees on assets held within the trust.

• Higher tax rates on income and capital gains:

  • 45% on income over £1,000.

  • 20% CGT (28% for residential property), with just a £600 exemption.

On top of that, discretionary trusts face periodic charges every 10 years, potentially up to 6% of the value over the nil rate band. And if assets are distributed, exit charges may apply too—proportionate to how long they’ve been in the trust.

Then there’s one of the biggest and most frequently overlooked traps: the Gift with Reservation of Benefit (GWR) rule. This catches many people out. If the person creating the trust (the settlor) continues to benefit from the assets in any way—say, by receiving income, using a property, or having access to the capital—then HMRC will treat the gift as not having been made at all. The asset remains in the estate for IHT purposes, defeating the whole point of the exercise.

It’s a common error, especially in cases where someone sets up a trust but wants to “retain access just in case.” Unfortunately, HMRC doesn’t do “just in case.”

In short: the tax relief might come eventually, but the costs—and risks—start immediately.

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When Trusts Do Still Make Sense

There are still times when trusts are the right tool—particularly for:

• Families with complex needs or potential future disputes.

• Planning involving children or vulnerable beneficiaries.

• Non-UK domiciled clients using excluded property trusts.

• Situations where control and asset protection matter more than tax savings.

• Some specialist cases like Discounted Gift Trusts or Loan Trusts, which offer structured access or immediate IHT benefits—without falling foul of the GWR rules if properly structured.

But for the average family looking to reduce IHT, a trust often creates more admin than it saves in tax.

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What Are the Alternatives?

Good IHT planning doesn’t need to be complicated. Often, simpler strategies are more effective, flexible, and cost-efficient:

✅ Gifting: Outright gifts (especially from surplus income) can be extremely effective with minimal paperwork.

✅ Family Investment Companies: A modern alternative to trusts, especially for entrepreneurial families. Offers control, flexibility, and long-term growth potential.

✅ Life Insurance in Trust: A straightforward way to cover the IHT liability directly—so your beneficiaries receive the estate intact, quickly, and free of tax. It’s often a more cost-effective solution than using a trust, with premiums typically lower than the cumulative charges of trust administration—and without the ongoing paperwork or restrictive rules.

✅ Offshore Bonds: Used carefully, these can be a tax-efficient wrapper, especially when paired with assignment (eg to children / grandchildren) or trust structures.

In many cases, these approaches offer the same or better outcomes—without the 45% tax rate, trust admin burden, or risk of falling foul of GWR rules.

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So, Should You Use a Trust?

Trusts have their place. But for many families, they’re an expensive and complicated way to solve a problem that could be tackled more simply.

Before jumping into trust planning, it’s worth asking: is this the best tool for what I’m trying to achieve—or just the traditional one?

If you’d like help reviewing your options, or understanding what works best for your situation, get in touch today.

My name is Russell Hammond. I’m a Chartered Fellow of both the CISI and PFS, with over 20 years of experience advising high-net-worth individuals and their families. Fewer than 0.01% of UK advisers hold both these Fellowships—so when it comes to wealth structuring, you can know that you’re in safe hands.

Schedule a free consultation with me here

Let’s make sure your IHT strategy is built not just on tradition—but on what actually works.