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Part 3 – Business Relief, Trusts and Other Inheritance Tax Planning Tools

By this point, we’ve looked at how gifts can reduce the value of your estate and why simply giving assets away doesn’t always work.

However, lifetime gifting isn’t the only way to reduce an Inheritance Tax liability.

Depending on your circumstances, there may be valuable reliefs available for business owners, farmers and those considering trusts as part of their estate planning.

The key is understanding which strategies genuinely work—and which are often oversold.

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Business Relief

If you own a business, you may be entitled to one of the most valuable Inheritance Tax reliefs available.

Business Relief (formerly known as Business Property Relief) can reduce the value of qualifying business assets for Inheritance Tax purposes, in some cases by up to 100%.

For many family businesses, this can significantly reduce—or even eliminate—an Inheritance Tax liability.

What Qualifies?

The rules are complex, but Business Relief can apply to certain qualifying assets, including:

• Shares in many unquoted trading companies.
• Interests in sole trader businesses.
• Interests in partnerships.
• Certain qualifying business assets used in a business.

However, not every business qualifies.

For example, businesses whose main activity is investment rather than trading may not qualify. Companies that primarily hold investment properties are a common example.

There are also minimum ownership periods and detailed anti-avoidance rules to consider.

Example

Sarah owns a manufacturing company valued at £2 million.

If the company qualifies for Business Relief, much or all of its value may be relieved from Inheritance Tax.

Without relief, the potential tax liability could be substantial.

This is one of the reasons why succession planning for business owners should begin well before retirement.

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Agricultural Relief

Agricultural Relief can also reduce the value of qualifying agricultural property for Inheritance Tax purposes.

Like Business Relief, the rules are detailed and depend on factors such as:

• the type of land,
• how it is occupied,
• who farms it,
• and how long it has been owned.

Many farming families benefit from a combination of Agricultural Relief and Business Relief, although each case needs careful review.

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Trusts – What Are They?

Few areas of tax planning generate more confusion than trusts.

Some people believe putting assets into a trust automatically avoids Inheritance Tax.

Others think trusts are only for the extremely wealthy.

Neither is true.

A trust is simply a legal arrangement.

Instead of owning assets personally, the assets are held by trustees, who look after them for the benefit of one or more beneficiaries.

Trusts can provide:

• asset protection,
• flexibility,
• control over when beneficiaries receive assets,
• and, in some circumstances, valuable tax planning opportunities.

However, they are not a magic solution to Inheritance Tax.

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Different Types of Trust

There are many different types of trust, each with its own tax treatment.

The most common include:

Bare Trust

A bare trust is the simplest form of trust.

The beneficiary is absolutely entitled to the assets.

For Inheritance Tax purposes, a gift into a bare trust is usually treated much like a direct gift to the beneficiary.

This means the seven-year rule generally applies.

Bare trusts are often used where children are involved, although there are other planning considerations, particularly for Income Tax and Capital Gains Tax.

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Discretionary Trust

A discretionary trust gives trustees flexibility.

Instead of one beneficiary automatically receiving the assets, the trustees decide:

• who benefits,
• when they benefit,
• and how much they receive.

This flexibility can be extremely valuable where family circumstances may change over time.

However, discretionary trusts are subject to their own Inheritance Tax regime and may be liable to periodic and exit charges.

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Interest in Possession Trust

An interest in possession trust gives one beneficiary the right to receive income from the trust, while the capital eventually passes to someone else.

These trusts are commonly used in wills where a surviving spouse needs income during their lifetime while preserving the capital for children from an earlier relationship.

The tax treatment depends on when the trust was created and the type of interest involved.

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Do Trusts Avoid Inheritance Tax?

Sometimes.

Often they don’t.

It depends entirely on:

• the type of trust,
• the assets involved,
• how the trust is structured,
• and what happens afterwards.

Simply transferring assets into a trust does not automatically remove them from your estate.

In fact, some transfers into trust can trigger an immediate Inheritance Tax charge if they exceed the available Nil Rate Band.

Professional advice is therefore essential before creating a trust.

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The Ten-Year Charge

One reason trusts need careful planning is that certain trusts fall within the Relevant Property Regime.

Broadly speaking, discretionary trusts can be subject to:

• a periodic charge every ten years, and
• an exit charge when assets leave the trust.

The maximum ten-year charge is broadly 6% of the value above the available Nil Rate Band, although the calculation is more complicated in practice.

Fortunately, many family trusts pay little or no periodic charge because of the value of the trust fund and available allowances.

The important point is that trusts are not maintenance-free.

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Ongoing Responsibilities

Once a trust has been created, the trustees have legal responsibilities.

These may include:

• maintaining proper accounting records,
• submitting Trust Registration Service information where required,
• filing tax returns,
• managing investments,
• keeping minutes of decisions,
• and acting in the best interests of the beneficiaries.

Trusts should therefore be established because they achieve a clear objective—not simply because someone has heard they “save tax.”

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Life Insurance Written in Trust

One planning technique that is often worthwhile is writing a life insurance policy into trust.

If a policy pays into your estate, the proceeds may increase the value of your estate for Inheritance Tax purposes.

Where the policy is written into an appropriate trust from the outset, the proceeds will generally pass directly to the beneficiaries without forming part of your estate.

This can produce two important advantages:

• the money is often available much more quickly, and
• it may fall outside your estate for Inheritance Tax purposes.

Many people are surprised to discover that completing a simple trust form when taking out a policy can potentially save significant tax.

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When Trusts Can Be Particularly Useful

Trusts are often appropriate where:

• there are young children,
• a beneficiary is vulnerable,
• there is concern about divorce or bankruptcy,
• there are second marriages or blended families,
• assets need protecting over several generations,
• or flexibility is required because future circumstances are uncertain.

In these situations, the objective is often as much about control and asset protection as tax.

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When Trusts May Not Be Appropriate

A trust may not be the right solution where:

• the tax savings are minimal,
• the administration costs outweigh the benefits,
• the family simply wants assets to pass outright,
• or the arrangement creates unnecessary complexity.

Every family’s circumstances are different.

There is rarely a “one size fits all” solution.

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A Real-Life Example

John and Sarah have a combined estate worth £2.8 million, including a successful family company.

They want the surviving spouse to remain financially secure but also want to ensure the business ultimately passes to their children.

Rather than relying on simple mirror wills, specialist estate planning could consider:

• whether the company qualifies for Business Relief,
• how their wills should be structured,
• whether any trusts are appropriate,
• and whether lifetime gifting could reduce the taxable estate.

The result is often a plan that protects both the family and the business while minimising unnecessary tax.

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The Key Message

Trusts are powerful legal tools—but they are not shortcuts.

Used correctly, they can:

• protect assets,
• provide flexibility,
• support vulnerable beneficiaries,
• and reduce tax in appropriate circumstances.

Used incorrectly, they can create unnecessary cost, complexity and even additional tax charges.

Good estate planning is about choosing the right solution for your family’s circumstances—not simply using a trust because someone suggested it at a dinner party.