How trusts affect inheritance tax on death

Trusts can significantly affect the inheritance tax position of an estate, but their impact is not always immediately obvious.

For solicitors, this is often an area where specialist input can add value, particularly where the structure or documentation is not straightforward.

How trusts interact with the estate

The key question is how the deceased’s interest in the trust is treated for UK inheritance tax purposes.

This will depend on the type of trust and the nature of the interest held. In some cases, trust assets may form part of the estate. In others, they may sit outside it but still require disclosure.

How trusts are treated in practice 

In practice, dealing with trusts in an estate is less about identifying that a trust exists, and more about understanding how it interacts with the inheritance tax position.

This will typically involve:

• reviewing the trust documentation to establish the nature of the interest
• considering whether any value falls within the estate for inheritance tax purposes
• ensuring that any relevant information is reflected correctly in the IHT400

Even where trust assets fall outside the estate, disclosure may still be required depending on the circumstances.

Common structures

We frequently see:

• loan trusts 
• gift trusts 
• discretionary trusts 
• interests in possession 

Each of these can have different implications and need to be considered carefully from an inheritance tax perspective.

Where issues arise

Typical areas of difficulty include:

• misunderstanding whether the trust is relevant at all 
• incorrect treatment of loan trust arrangements 
• failure to obtain or review trust documentation 
• inconsistencies between trust and estate reporting 

These issues often arise not because the rules are particularly complex, but because the underlying facts are not fully understood at the outset.

Practical approach

From a solicitor’s perspective, it is usually helpful to:

• identify early whether any trusts exist 
• obtain the relevant documentation 
• consider whether tax input is required 

This avoids the position where issues are discovered late in the process which can delay the preparation of the inheritance tax return and create unnecessary rework.

Conclusion

Trusts do not necessarily make an estate complex, but they do require careful consideration to ensure the inheritance tax position is correct. In many cases, the complexity lies not in the trust itself, but in understanding how it interacts with the wider estate.

Final Thoughts

If you have an estate involving trusts and would like input on the inheritance tax position, we would be happy to assist alongside your existing work.