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Taxation of UK Resident Trusts

UK Resident Trusts

Do you know if you’ll have to pay inheritance tax? How do you pay? Have you saved enough to avoid inheritance tax? While the concept of inheritance tax is simple, the larger your estate the more tricky it becomes. 

Reputed and experienced estate planners can help you manage your estate as well as help you save the maximum in taxes.

What is the tax rate on inheritance?

Planning your estate can be tricky. But with proper planning and understanding, you can avoid paying any tax on inheritance. 

Let’s understand the basics. 

The HMRC gives you a tax allowance, called the nil-rate band, up to £325,000. This means that your estate is exempt from inheritance tax if it is less than the nil-rate band threshold. 

You’ll have to pay inheritance tax if your estate exceeds this amount. 

The government of the UK imposes a 40% tax on the amount that exceeds the nil-rate band. 

Calculating inheritance tax is simple. However, the bigger the estate, the more difficult it is to calculate inheritance tax. 

You can do inheritance tax planning with the help of legal instruments such as 

  • Wills
  • Trusts

Wills and Trusts for Inheritance Tax Planning

It is recommended to use a mixture of wills and trusts for estate and inheritance tax planning. Other taxes involved with estate planning include income tax, capital gains tax. 

Wills are legal instruments of estate planning that have information about your assets, debt, and the beneficiaries you want to leave the estate to. Wills document the wishes and instructions about distributing the estate after the individual passes away. 

Trusts are legal arrangements to protect assets and eventually distribute them according to the trustee’s wishes. The trust may be used before the individual passes away as well, by the individual in certain cases. 

What information do you need to plan your estate?

Your estate planner will need some information and documents from you to draw up your estate plan. 

Assets – Your estate planner will need your asset ownership documents that certify that you’re the owner like titles, accounts, and stocks.

Debt – If you have any debt, let your estate planner have the documents of mortgages and loans whichever is applicable. 

Beneficiaries – Appoint beneficiaries and provide their personal information to your estate planner. These documents should contain full names, addresses, phone numbers, dates of birth, and children. 

You will need to name your beneficiaries. It is important to speak to your beneficiaries to notify them. They may not want to take on the added responsibility. It is advisable to take their consent before appointing them. 

Also, appoint more than one beneficiary in case they are indisposed to handle your estate after you.

Taxation of Trusts in the UK


Liable to Pay Inheritance Tax

When you put assets into a trust, you may or may not have access to the assets depending on what kind of trust it is. 

There are two types of trusts:-

Revocable trusts – These trusts can be modified at any time if the trustee wishes.

Irrevocable trusts – Irrevocable trusts can’t be modified at any time after they have been made, according to the trustee’s wishes. 

These trusts can affect your taxes and help you save more. 

Capital Gains Tax – Capital Gains Tax (CGT) is imposed on an inherited property if it appreciates in value. Your heirs will have to pay this tax when they sell the property. You can save this tax with the help of trusts. Simply put the property in a trust. You can reduce the tax significantly. 

Inheritance Tax – The rules for inheritance tax allow you to increase the nil-rate band. You and your spouse/civil partner can increase the nil-rate band under certain circumstances to £650,000. You can also make gifts of the surplus amounts. The gift is not taxable as long as you survive for 7 years after you’ve made the gift. 

Income Tax – Using trusts your heirs can share the income from the assets in the trust and make use of the personal allowances. The trustees do not lose control of the assets in the trust.

Additionally, under certain circumstances, you may be able to reduce your inheritance tax to 36%. 

If you plan your estate cleverly, you can avoid paying any inheritance tax at all. 


Inheritance tax in the UK is levied by the UK government on inheritance beyond the nil-rate threshold. Inheritance below this amount does not attract any inheritance tax. You can avoid paying any inheritance tax by planning your estate. 

The bigger the estate, the more tricky the planning. A mixture of wills and trusts is recommended for bigger estates. Furthermore, leaving the estate to your spouse or civil partner can increase the nil rate band and allowances. 

If you have a bigger estate, it is advisable to contact a reputed estate planner to plan all your taxes that come with your estate like income tax, inheritance tax, and capital gains tax. 

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