How placing money into trust can save Inheritance Tax and protect your family’s wealth 

Inheritance Tax (IHT) is one of the most frustrating taxes for families. You’ve spent a lifetime building your wealth, yet up to 40% of it could be lost to tax before it reaches the people you care about. The good news is there are ways to reduce this – while still keeping control and protecting your family. 

One approach worth considering is placing money into a discretionary gift trust. Below, I’ll explain how this works using a real‑world style example. 

A simple example: Mandy and Paul 

Mandy and Paul are both in their early 70s. They’re comfortably retired, their income more than covers their day‑to‑day spending, and they’ve built up healthy savings. 

After reviewing their finances, they and their adviser identify £200,000 that they’re confident they won’t need during their lifetime. Their main goals are: 

• To reduce future Inheritance Tax 

• To keep control over how and when family members benefit 

• To protect the money from risks like divorce or bankruptcy 

Their adviser recommends placing the £200,000 into a discretionary gift trust, invested for their family’s future. 

What does “placing money into trust” actually mean? 

In simple terms, Mandy and Paul move £200,000 out of their personal ownership and into a legal arrangement called a trust. The money is invested for long‑term growth and held for the benefit of their family – for example, their children and grandchildren. Mandy and Paul act as trustees, meaning they stay closely involved and retain significant control. 

Although the money is no longer theirs personally, they still help decide: 

• Who benefits 

• When money is paid out 

• How much each person receives 

This flexibility is what makes a discretionary trust so powerful. 

Why this can save over £80,000 in Inheritance Tax 

If Mandy and Paul kept the £200,000 and it formed part of their estate on death, it could be taxed at 40%. That’s a potential £80,000 Inheritance Tax bill. 

By placing the money into trust and surviving long enough, that £200,000 can sit outside their estate, meaning it’s no longer subject to IHT. The result? Potentially £80,000 or more kept in the family rather than going to HMRC. 

The 7‑year rule – explained simply 

When money is gifted into a discretionary trust, it is treated as a Chargeable Lifetime Transfer (CLT) for IHT purposes. Because Mandy and Paul are making the gift jointly, it is treated as £100,000 each for IHT. If both survive seven years from the date of the gift, the full £200,000 sits outside their estates and is no longer subject to IHT. 

If either were to die within seven years, their £100,000 share of the gift would be brought back into account when calculating IHT on their individual estate – potentially using up some or all of their personal tax‑free allowance (known as the nil‑rate band – if you’re not familiar with this, our earlier blog Inheritance Tax (IHT) – The Basics covers this in plain English) and potentially increasing the tax on the remainder of their estate. This is why acting early matters. 

Trust planning works best when done with enough time to run the clock, rather than left until later in life. 

Keeping control and protecting family wealth 

One of the biggest advantages for Mandy and Paul is control. Because the trust is discretionary, no beneficiary has an automatic right to the money. Funds can be released gradually rather than all at once, and the money is kept safe from risks such as divorce, bankruptcy, or poor financial decisions by a beneficiary. 

This makes trusts particularly useful when you want to support family members responsibly – not simply hand over a lump sum and hope for the best. 

Is this right for everyone? 

Placing money into trust isn’t suitable in every situation. You need to be genuinely confident that the money is surplus to your own needs – this isn’t something to do with funds you might need to draw on later. It’s also worth knowing that trusts involve set‑up costs, ongoing administration, and a degree of complexity that makes professional advice essential. In the right circumstances, however, they remain one of the most effective tools available for reducing Inheritance Tax and protecting family wealth – which is why they should always form part of a carefully considered financial and estate plan. 

Next steps 

If you’re wondering whether you could reduce Inheritance Tax and protect your family’s wealth, we’re here to help: 

• Take our Inheritance Tax Assessment to see where you stand.

• Book a free, no‑obligation initial consultation to talk through your options. 

A short conversation now could make a significant difference to what your family receives in the future. 

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