Preparing for the great wealth transfer
How can post-mortem tax planning preserve benefits?
Understanding ISA tax breaks available on death can help preserve a range of benefits for surviving partners
Optimising estate capital gains on death
Post-mortem tax planning allows individuals to optimise capital gains tax (CGT) treatment when settling an estate – but how best can this be exercised?
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Helping advisers guide their clients through £7tn of transfer opportunities and challenges
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Transferring wealth from one generation to another is a significant event that impacts everyone at some point.
David Butler Head of Business Development – Advice
How family dynamics impact the services that advisers offer Consumer expectations regarding giving and receiving an inheritance The services that consumers expect from their advisers Based on this research, several critical areas were identified as most important to advisers and clients when planning for wealth transfer. Over the coming months, we will delve into topics such as controlled wealth transfer, trusts, Family Investment Companies (FICs), family dynamics, managing vulnerabilities, and the importance of bespoke investment management in effective wealth planning and transfer. Understanding these elements is vital for ensuring that wealth transfer is managed smoothly and effectively, benefiting both current and future generations. Financial advisers are key to making this transition as seamless as possible, helping families secure their financial futures.
Financial advisers are essential in guiding families through this intricate process, offering invaluable support and planning for the inevitable. With the average age for inheritance now at 61, individuals face the dual challenge of using their inheritance wisely while also preparing for their own retirement and later life. Given the substantial value that financial advice can add during this life stage, intergenerational wealth planning has become a core component of many firms' advice services. The decisions made by advisers have profound implications for the families involved. Therefore, understanding consumer expectations and how other advisory firms approach this topic is essential. To assist advisers, we surveyed 150 advisers and over 2,000 high net worth individuals. The research aimed to explore:
Explore how Family Investment Companies can offer high-net-worth families a tax-efficient, controlled approach to transferring wealth across generations
Estate planning with Family Investment Companies
How loss relief can mitigate the impact of falling asset values on estates and reduce the inheritance tax burden
Post-mortem tax planning: IHT - Loss relief
How upcoming pension changes will reshape inheritance tax planning – practical steps advisers can take now to help clients reduce future liabilities
Deeds of variation can provide flexibility in estate planning and help families manage inheritance tax more effectively
Post-mortem tax planning: Deed of variation
Planning ahead: Pensions and inheritance tax
Understanding the distinctions between trust structures is increasingly important in navigating today’s tax and estate landscape
Trust matters: bare and discretionary trusts explained
As we approach the 'Great Wealth Transfer' – the largest generational wealth transfer in history – and navigate an increasingly complex tax landscape, estate planning has become more crucial than ever. Ensuring that clients have an appropriate and efficient estate plan in place not only benefits the client and their beneficiaries by ensuring optimal outcomes but also helps build relationships with the clients' wider network. This, in turn, aids in client retention, one of the biggest hurdles advisers will face during the 'Great Wealth Transfer'.
“A significant consideration in determining the appropriate holdings within the FIC is to minimise its exposure to tax”
Mr. Smith wants to provide financial help to his children as they grow older and start their careers. His children are in their teens, with the eldest about to start university. Mr. Smith aims to ensure they make considered financial decisions and avoid taking a series of 'gap years'. Mr. Smith runs a successful company with his wife, who takes a more background role. They have built up an investment portfolio and own four residential properties, with the acquisition of the final two partly funded by borrowing. All their assets are jointly owned. Mr. Smith is planning for the future and considering ways to mitigate future inheritance tax (IHT) obligations.
Read our report on Planning for the Great Wealth Transfer here. There are numerous ways to transfer wealth, each with its own merits. For many years, trusts were the preferred method when control was a priority for the donor. However, changes to the relevant property regime for inheritance tax (IHT) in 2006 have led to a decline in the use of trusts among high-net-worth individuals. Since then, Family Investment Companies (FICs) have gained popularity as a mechanism to replace or complement discretionary trusts. Transfers to trusts in excess of the nil rate band are chargeable at 20%, along with periodic and exit charges. Although FICs are less flexible, these charges do not apply, making them an attractive alternative for those looking to save on IHT, in a controlled manner. In essence, FICs are companies that house a family’s long-term investments, such as stocks, shares, mutual funds, and potentially property. Expenses incurred by the FIC, including the investment manager’s fee, are generally deductible. Parents (known as founders) initially fund the FIC by directly subscribing for shares or making loans. Subsequently, some shares are gifted (as Potentially Exempt Transfers, or PETs) to younger family members, who can benefit from the FIC at the appropriate time. Repayments of loans to founders are generally tax-free, ensuring parents are not left wanting.
Explore how Family Investment Companies can offer high-net-worth families a tax-efficient, controlled approach to transferring wealth across generations.
David Denton Head of Technical, Quilter Cheviot
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Shares with voting rights retained by the parents enable them to maintain significant control over the FIC. As board members, they can determine the investment direction and decide when any benefits to shareholders are provided, including which shareholders receive dividends. Depending on the FIC’s structure (share type, memorandum, articles, and shareholders’ agreements), growth in value may emerge in the gifted shares. Because the sum of the parts may be less than the value of the whole, there may be additional IHT benefits. In other words, the shares retained by the founders for their own use may have a lower value in their estate for IHT purposes. Bespoke legal advice is essential for valuing a close investment holding company according to voting rights, fractional ownership, and directors’ powers. In addition to managing private client and trust wealth, Quilter Cheviot manages investments on behalf of companies, including Family Investment Companies. A significant consideration in determining the appropriate holdings within the FIC is to minimise its exposure to tax. Generally, corporates do not suffer Corporation Tax on dividends received from shares held directly. However, if held through other vehicles by most companies, tax can be artificially inflated or the timing changed, as noted in the loan relationship legislation from 1996 and 2008. Additionally, there is a considerable difference between income tax for wealth owned personally (up to 45%) and corporation tax for FICs (up to 25%). Note that profit will ultimately need to be extracted from the FIC, with the relevant taxation of dividends or Capital Gains Tax (CGT) where the company is wound up. For those advising on wealth transfer for high-net-worth families where FICs have not been considered, certain valuable features may have been overlooked. In summary, these are:
FICs in action – a case study
Background
Annual income: Mr. Smith earns approximately £150,000. His wife is a higher rate taxpayer. Company shares: Held equally by Mr. and Mrs. Smith, qualifying for 100% business property relief. Business asset disposal relief: Both qualify in the event of a sale. Investment and rental properties: Worth £3.5 million. Main residence: Worth £1 million. Recent inheritance: £1.5 million.
Current status
Lower tax rates: Income retained within the FIC attracts lower tax rates (up to 25%) compared to Mr. Smith’s marginal rate of 45% and Mrs. Smith’s 40%. Interest relief: Transferring rental properties to the FIC allows full interest relief, though capital gains tax and SDLT are likely to apply. Potentially exempt transfers: Transfers of value become fully exempt if they survive for seven years. Increase in value: Future increases in investment value raise the company’s share value, benefiting the children’s shares outside their parents' estate. Dividend payments: Can be directed to the children when appropriate Control: Mr. and Mrs. Smith retain influence over the company’s assets and dividend payments.
Advantages of a Family Investment Company (FIC) in this example
Double taxation: Gains within the FIC, subsequently paid to shareholders may be taxed twice. Dividends to minors: Care is needed to ensure dividends paid to their minor children are not taxed on Mr. and Mrs. Smith. Limited reliefs: FICs do not qualify for Business Relief. Administrative costs: Running the company incurs administrative obligations and costs.
Key considerations
Mr. and Mrs. Smith decide to use their £1.5 million inheritance to subscribe to shares in the company, some of which will be given to the children. Any transfer by way of a loan is repayable to them without tax but remains within their estate.
Agreed action
Mr. and Mrs. Smith will be directors, and each issued one ‘A’ ordinary share. Three further classes of ordinary shares (B, C, and D) will be created for the children, with no voting rights but entitled to dividends. This structure allows dividends to be paid to the children once they reach 18 and increases the capital value of their shares as the company grows. Mr. and Mrs. Smith will initially subscribe to all shares and then gift the B, C, and D shares to their children. To ensure value passes to the children, 100 shares of each class will be created to swamp the A shares, ensuring a potentially exempt transfer.
Company structure
*Please note the case study above is for illustrative purposes only
At Quilter Cheviot, we offer comprehensive support in managing Family Investment Companies (FICs) and trust investments. With decades of experience in supporting advisers with estate planning, we excel in understanding structures to create tailored solutions that meet the unique needs of each client. Our bespoke service ensures that every aspect of estate planning aligns with your client's financial goals and tax efficiency. Our team of experienced investment managers is dedicated to guiding you and your clients through these complexities, helping to secure the financial future of your clients' loved ones.
FICs, estate planning and Quilter Cheviot
IHT: By creating multiple share classes at the outset, gifted shares, which leave the estate over seven years, will have specific rights to capital and subsequent growth. Additionally, the shares retained by the founder may have a lower value for IHT than their net asset value. Control: The recipients of the shares gifted by the founders are restricted in their ability to sell or transfer what they have received. Engagement: Involving younger generations promotes a legacy of financial knowledge and stewardship, including, where appropriate, involvement in the company’s investment strategy.
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Over the last few decades pensions and inheritance tax (IHT) have never been more than occasional acquaintances. This is set to change from 6 April 2027 when an individual’s remaining pension funds at death will form part of their taxable estate. This will mean around 10,500 new estates brought within the scope of IHT and a further 38,500 paying more tax.
How can pensions be used to reduce Inheritance tax?
The inclusion of pensions means many estates will have to deal with a new or increased IHT liability. Estate planning often involves gifting wealth, and pensions can now be included in the pool of assets that can be given away, assuming the minimum pension age has been reached. Omitting to take tax-free cash has been a straightforward approach to keeping the value of the estate down: wealthier clients deeming the IHT exemption to be more valuable than freedom from income tax. Such clients will no longer be incentivised to leave their tax-free cash untouched and could decide to withdraw it and gift it, perhaps to a trust appointing themselves as trustee of to ensure ongoing control of the investments. The receipt of tax-free cash in the new world will not change the IHT position nor suffer an income tax charge. It can, therefore, be taken without penalty but does require a decision to be made about the remaining fund. Selecting drawdown gives maximum flexibility as funds can remain in the pension scheme and if an annuity is suitable could be purchased later. Tax-free cash is normally restricted to 25% of the amount crystallised up to a total lifetime amount of £268,275, although some clients are entitled to more. High value estates can, therefore, be reduced by £268,275 or more with little effort. The usual rules apply so as long as the donor survives seven years from the date of the gift the transfer and any subsequent capital growth is outside of the estate. Gifts can be made to individuals, bare trusts or discretionary trusts. Transfers to the latter are CLTs and are immediately taxable if the cumulative amount exceeds the available nil rate band.
“Using tax-free cash to make an outright gift and making regular gifts of flexi-access drawdown withdrawals are quick wins that can reduce the size of the estate, but in the longer term a more holistic approach is likely to emerge”
Why are pensions being brought into the taxable estate?
As there is no obvious reason why pensions should be exempt from IHT when other assets are not, a better question is ‘why now?’ The exemption is long standing but it was some minor technical changes to death benefits in 2015 that turned defined contribution (DC) pensions into particularly efficient IHT planning vehicles. One of those changes was that after the member’s death any individual could have a beneficiary drawdown arrangement set up in their name, allowing pension funds to be passed to them without leaving the tax-privileged pension environment. This could continue to a ‘successor’ beneficiary allowing for indefinite and tax-efficient transfer of wealth between generations. Unsurprisingly, since then pensions have been marketed and used for IHT planning by those with enough wealth to not have to rely on their them in retirement.
Can drawdown be used to reduce the value of the estate?
Flexi-access drawdown can be used to make regular gifts making use of the ‘normal expenditure out of income’ exemption. Clients who have omitted to take benefits due to the current favourable IHT position are now free to use drawdown to make regular gifts. Tax-free cash and drawdown are linked, so to designate to flexi-access drawdown a decision about tax-free cash must also be made. To benefit from this exemption three main conditions must be met which are that gifts must be made from income, form part of a regular pattern of gifting and not reduce the donor’s standard of living. The first is easily met as withdrawals from drawdown count as income. Clients should obtain financial and/or legal advice to ensure they meet the other two requirement, but regular gifts to the same person are more likely to qualify than one-off gifts. Documenting gifts is also important, and the donor could consider completing the IHT403 form in advance to assist their personal representatives claiming the exemption after their death. Again, to retain control of the investment strategy, regular gifts could be made to a discretionary trust appointing the donor as a trustee. As regular gifts out of income are exempt the nil-rate band is not used up and there are no immediate or ongoing IHT consequences.
Takeaways
Using tax-free cash to make an outright gift and making regular gifts of flexi-access drawdown withdrawals are quick wins that can reduce the size of the estate, but in the longer term a more holistic approach is likely to emerge. Many of the usual approaches such as gift trusts, loan trusts, discounted gift trusts, business or agricultural relief and family investment companies will still have their place and will help mitigate any IHT liability by considering the total value of the estate that is comprised of many different types of assets, of which the remaining pension fund is one.
To counter what HMRC consider to be this misuse of pensions, unused pension funds and death benefits will be included in the client’s death estate from 6 April 2027. Exactly how this will be achieved is subject to consultation, which closed for comment in January and at the time of writing we are still awaiting the government’s response to the many issues raised. It is important to note that the consultation is only considering the mechanics of how, when and by whom any tax liability is paid, rather than whether pensions are within the scope of IHT. So, irrespective of the finer detail, we know that pension benefits will be subject to up to 40% IHT for deaths after 5 April 2027. There is, therefore, no reason why estate planning (considering the likely value of pensions at death) cannot commence now. This is especially pertinent for those who would likely make use of potentially exempt transfers (PETs) and chargeable lifetime transfers (CLTs) to mitigate their IHT liability: it makes little sense to wait almost two years before starting the seven-year clock. The following sections assume the client is in at least reasonable health and expected to survive beyond 5 April 2027.
“As there is no obvious reason why pensions should be exempt from IHT when other assets are not, a better question is ‘why now?’”
Upon the death of an individual, any ISAs they hold are effectively frozen, preventing the distribution of funds to beneficiaries during the administration of their estate.
“An APS allowance can only be transferred once, but if there is more than one ISA to inherit, it can come from multiple providers”
If the deceased leaves the assets held in an ISA to someone other than their spouse or civil partner, the partner maintains the right to assume some benefits. Perhaps surprisingly, they are still entitled to an increased allowance equivalent to the value of the ISA assets, even if they do not receive the money itself. This is known as an Additional Permitted Subscription (APS) and can be used regardless of what the deceased stated in their will or if they died intestate. The APS allowance is the value of the money passed on at transfer, or the value at death, whichever is higher, and the surviving partner can choose where to transfer the inherited savings.
However, the status of the partnership at the time of death is a vital component. The spouse must have been living with the deceased for the APS allowance to apply. If the couple had separated or the partnership or marriage had broken down, the surviving partner cannot access the APS allowance. Additionally, if the surviving partner is under 18 years of age, they cannot use a Junior ISA for the APS allowance. An adult product must be acquired. Once these conditions have been met, the spouse or partner has a choice on what to do:
An APS allowance can only be transferred once, but if there is more than one ISA to inherit, it can come from multiple providers. Importantly, you can only have one cash ISA and one stocks and shares ISA per tax year, but these rules are not breached if you open up an ISA for the purpose of an APS transfer. It is important to know that the surviving spouse or partner must also act within a set time frame to apply to access the APS allowance. For ‘in specie’ transfers, or keeping hold of the ISA in its existing state, there is a period of 180 days from when the beneficial ownership passes to the surviving spouse or civil partner for them to act. For cash subscriptions, this timeframe extends to three years from the date of death. After three years, the application needs to be lodged within 180 days of the completion of the administration of the estate. Once the transfer has been made, the normal ISA rules apply and the money is treated as if it were previous years’ subscriptions made by the surviving spouse.
This is considered a 'continuing ISA'. During the administration period, the account retains its existing tax position, which is maintained until one of the following three conditions is met: • The administration of the estate is complete. • The ISA is closed. • It is three years after the person’s death.
Understanding ISA tax breaks available on death can help preserve a range of benefits for surviving partners.
Keep the money with the original ISA provider. Put the money with their own ISA provider. Open up a new cash or stocks and shares ISA and place the additional subscription there.
Capital losses for private clients can be carried forward, but for this valuable feature of the tax system to be utilised, losses must be reported before the end of four full tax years following the year the loss occurred.
There are other points to consider regarding CGT upon death that may impact the post-tax outcome. If an asset of an estate is going to be disposed of, it may be better to transfer the asset to the recipients of the estate before disposal. This could be because there are multiple eventual recipients who each have unused annual exempt amounts. Some assets could be disposed of in the hands of the personal representatives to absorb their annual exempt amount and the remainder transferred out whereby the recipient’s annual exempt amount could be utilised. Note that personal representatives are chargeable at the higher rate of 24% only. It is also possible that some recipients could be non-UK tax residents that do not pay UK CGT, so that even substantial gains in the hands of the personal representative may simply not be taxable if assets are transferred out to, effectively, non-taxpayers. Otherwise, because of their own income tax position, the recipients may be subject to lower rates of CGT than the personal representative. Clearly, even post-death planning when winding-up an estate needs considerable thought, and is an important area on which to provide advice.
It is often assumed that losses cannot be carried back. However, in the specific situation of a loss in the tax year someone dies, losses made before their death may be carried back. Of course, no capital gains tax (CGT) arises on death and the personal representatives are treated as acquiring the assets of the deceased at the market value upon death – typically, this is the same starting value for the purposes of calculating inheritance tax (IHT). Additionally, there is no CGT liability when those same assets are transferred from the personal representatives to the beneficiaries of the estate and each of those recipients are considered to have received those assets at the market value at the time of death for CGT purposes and IHT purposes. In some situations, the personal representative may sell an asset during the process of administration of the estate. If so, in that capacity as personal representative, they will be subject to CGT – although, in this capacity they have the same annual exempt amount as an individual would in the year of death and, also, in the two years following.
What does this mean?
Any gains accruing on the disposal of assets by the personal representatives after death is calculated with reference to the market value upon death, but with the availability of a full annual exempt amount in the tax year of death and the following two tax years. However, where an allowable loss has been made by the deceased in the tax year that they die on a disposal before their death, such a loss can be set against chargeable gains in that year. Perhaps surprisingly, though, any excess losses can then be carried back and used against gains in the three previous tax years. The gains accruing in a later year need to be relieved ahead of those of an earlier year and any further remaining unused losses cannot be carried forward and set against gains made by personal representatives, or those who inherit. This would normally be reported by the personal representatives on completion of a self-assessment tax return relevant to the tax year of the client’s death, following the tax year of death. The deadline for a self-assessment tax return is 31 January each year.
“If an asset of an estate is going to be disposed of, it may be better to transfer the asset to the recipients of the estate before disposal”
How loss relief can mitigate the impact of falling asset values on estates and reduce the inheritance tax burden.
Assets held in an estate upon death are typically assessed for IHT at their ‘open market value’. Legislation states that this is the price which the property might reasonably be expected to fetch if sold in the open market at that time. It is also known as the probate value and is used to calculate inheritance tax (IHT).
Should these assets reduce in value over the coming months or years, and are sold by the personal representatives, there is planning to be considered. This is because the value received by any beneficiaries will be lower than that used as the basis for the calculation and payment of IHT. Loss relief removes an unfairness, allowing an adjustment to be made for the purpose of IHT according to the value when sold. Separate claims with different conditions are available for shares and funds, and land and property which also determines the appropriate timescales within which this can be done.
Shares and funds (claim form IHT35)
For shares and funds, the appropriate person must undertake the claim no later than five years following death, but only for disposals within one year of death. Qualifying investments include shares and securities on UK and foreign exchanges, while authorised unit trusts and open ended investment companies (OEICs) are also included. However, unlisted shares and securities do not qualify. It is important to note that the calculation should take into account all shares that are sold in the deceased’s estate within the year following death. This includes those that give rise to a gain as well as a loss, because it will be the net amount of all the qualifying investments sold that will be relieved. The numbers are calculated on gross proceeds, excluding incidental cost of sales. There are special rules for cancelled or suspended assets which cannot be sold, but that may result in relief. Anti-avoidance provisions exist to ensure that assets sold at a loss for the sake of making a claim and then swiftly repurchased are matched if made within two months of the sale. If the shares were given to a beneficiary to satisfy a pecuniary legacy, with the consent of the person receiving the legacy, this will count as a sale, but otherwise not for gifts. Leading accountancy firms have cautioned on the importance of accuracy when navigating these reliefs.
“Loss relief removes an unfairness, allowing an adjustment to be made for the purpose of IHT according to the value when sold”
Land and property (IHT38)
A similar relief applies for post-death sales of land and property within four years of death and claimed within seven. Gains on other land or property disposed of within three years must be netted off, but only losses on the fourth year need to be taken into account. In terms of anti-avoidance, re-purchases should not be made within four months after the last sale within three years following death. The contract date is normally the date of exchange. Other restrictions apply: one being, if the difference between the value at death and the value at sale was lower than £1,000 or 5% of the probate value, relief is not available. Also, in order that the relief is not artificially created, relief is not available when sold to a person, or certain connected persons, who are beneficially entitled. The relief will not apply if the purchaser was only entitled to some of the property sold. Ultimately, both reliefs need to be claimed, and should not be taken for granted. It is also worth noting that reducing the taxable estate could have the effect of reinstating some, or all, of the residence nil rate band, so effectively the advantage could be 60%, rather than 40%.
Learn more about Quilter Cheviot
This is a marketing communication Trusts, estate planning, mortgage, tax: Trusts, Estate planning, Buy to Let Mortgage, Taxation and Inheritance Tax Advice are not regulated by the Financial Conduct Authority. Tax: Tax treatment varies according to individual circumstances and is subject to change. Quilter Cheviot and Quilter Cheviot Investment Management are trading names of Quilter Cheviot Limited. Quilter Cheviot Limited is registered in England and Wales with number 01923571, registered office at Senator House, 85 Queen Victoria Street, London, EC4V 4AB. Quilter Cheviot Limited is a member of the London Stock Exchange and authorised and regulated by the UK Financial Conduct Authority and as an approved Financial Services Provider by the Financial Sector Conduct Authority in South Africa. Approver: Quilter Cheviot Limited 23 September 2025
Deeds of variation can provide flexibility in estate planning and help families manage inheritance tax more effectively.
A deed of variation (DoV) is a means by which the recipients of an estate, through a will or intestacy, redirect what they would receive or have already received in favour of other people, a charity, or a trust.
A discretionary NRB will trust can provide three significant benefits above a transferable NRB:
It is a formal legal document and, while it may be undertaken for a variety of reasons, it is most frequently used for inheritance tax (IHT) planning. Under the inheritance legislation (IHTA 1984), a DoV allows the original recipient to redirect any monies – or anything else of financial value – as if they had not taken formal ownership. In other words, this enables them to act as if the allocation had already been decided at the time of death and had already been made by the deceased. A simple variation may be made in favour of an individual, where the original beneficiary would rather someone else benefits. If actioned, it would mean there is no potentially exempt transfer (PET), which would ordinarily require the original beneficiary to live seven years to ensure it was exempt. If a deed of variation means that more than 10% of the net estate of the deceased goes to charity, the 36% rate of IHT will apply on any chargeable portion of the deceased’s estate. To ensure due process, several formalities need to be observed:
Deed of variation by a spouse or civil partner
Before the introduction of the transferable nil rate band (NRB) on 9 October 2007, if a husband or wife died but did not use their NRB it would normally have been lost. The failure to use the NRB could have happened by virtue of a joint ownership of property automatically passing under survivorship, or deliberately through the will of the deceased providing for the surviving spouse. Assuming the receiving spouse was UK domiciled, this transfer would have been IHT free. However, it would potentially create a larger second death liability as the combined estate would only benefit from one NRB. With good legal advice, this could be planned for by both spouses. Their will(s) could have included discretionary NRB trust wording so that, upon the first death, the value of their estate up to the NRB at the point they died would be placed in a discretionary trust. The surviving spouse could be a potential beneficiary. Because the surviving spouse does not inherit directly, no value adds to their estate and no PET or chargeable lifetime transfer (CLT) needs to be made. Where a discretionary NRB trust was not written into the deceased spouse’s will during their lifetime, a well-advised surviving spouse could, within two years of receiving from their deceased partner, undertake a DoV of what they had received, up to the value of the NRB, in favour of a discretionary trust. For IHT purposes, this variation and subsequent trust would be seen as having been created by the deceased therefore using their NRB, and once again the surviving spouse could be included as a potential beneficiary under the trust without a gift with reservation (GWR). Although the transferable NRB legislation, effective 2007, initially made this planning look redundant, there can be advantages to creating a discretionary NRB will trust or, alternatively, diverting the DoV into a trust.
“With increasing life expectancy, adult children often inherit later in life. This can mean that the deceased’s children are often of an age at which they do not require the use of the inheritance”
The document must be in writing, executed as a deed and be irrevocable. Assets can only be varied once, but where there are multiple recipients, individually they can each choose to vary their inheritance. It must be executed within two years of death. It should refer to the part of the will or intestacy being varied and be signed by all those who would or might have benefited from the original provisions, clearly stating which inheritances are affected and how they are changing. The exercise should not be undertaken in order to receive money, or the value in other means, of the asset that is to be transferred. There is only a requirement for the deed to be sent to HMRC if there is a change in the IHT payable on the estate of the deceased.
Advanced planning includes the use of trusts, and variations by the spouse or civil partner.
“Under the inheritance legislation, a deed of variation allows the original recipient to redirect any monies as if they had not taken formal ownership”
Where the growth in value of the assets in the trust are expected to be greater than the growth in value of the NRB between the first and second death. Given the NRB reached £325,000 in 2009-2010 but is set to be frozen until 2030, any growth in the value of the assets of the NRB discretionary trust is effectively outside of the estate, rather than growing in an estate with a frozen NRB. Whereas the discretionary trust route keeps growing wealth outside the surviving spouse’s estate, it also could mean that it preserves the residence NRB. This is because the residence NRB (RNRB) tapers out on the basis of £1 for every £2 for an estate in excess of £2 million, so relying on wealth transferring from the first to die to the surviving partner has a great chance of swelling the second estate rather than wealth transferring into a NRB discretionary trust on the first death. Because the transfer to the trust is not made by the surviving spouse, the value in that trust cannot be considered as theirs by the local authority for long-term care purposes or by other creditors.
Where the same planning is instead undertaken by a DoV the first two benefits can apply, but it is possible that the surviving spouse undertaking a DoV to a trust could be considered to have deliberately deprived the estate, particularly if soon thereafter there is a claim for long-term care funding. A particularly beneficial situation can apply when a surviving spouse remarries. This is because, on their death, the total value that can be carried forward is 100% of one residence nil-rate-band (RNRB) albeit this could be, for example, 30% from one partner and 70% from another, according to how much RNRB was not used on the death of former partners. However, optimum planning would entail, on the first death, the transferable NRB being relied upon and the new spouse undertaking a discretionary NRB trust so, effectively, two NRBs would be alienated from the estate as well as the NRB of last person to die. Another planning opportunity arises when a surviving partner, when receiving everything from the deceased, instead transfers some or all of that inheritance into a power of appointment trust by way of a DoV. This would create an ‘immediate post-death interest’ (IPDI), from which the surviving spouse could enjoy income, while the trustees could advance capital to other beneficiaries, affecting a PET from the surviving spouse yet maintaining the transferable NRB from her former partner. Finally, if the surviving spouse inherited assets through the unlimited exemption from IHT, which also included assets that qualified for business relief (BR), the assets qualifying for BR could be varied directly to other beneficiaries without an IHT consequence.
With increasing life expectancy, adult children often inherit later in life. This can mean that the deceased’s children, the most common beneficiaries, are often of an age at which they do not require the use of the inheritance. Should they choose to receive it and subsequently gift it, this would, of course, be a PET and the tax-free status of that PET would hinge on the donor living seven years beyond the date of the gift. An additional consideration is that the recipients of that PET would be able to enjoy the gift without restriction, which may not be desirable. An alternative way to treat the inheritance would be a DoV in favour of the deceased’s grandchildren, so that a PET by the original recipient isn’t required. Albeit, as above, this does not prevent the new recipients doing as they wish with their new wealth. The perhaps optimal way to plan is for the original recipient to undertake a DoV into a discretionary trust. This has four possible benefits:
Deed of variation by another recipient
The person varying the asset to the discretionary trust can be a discretionary beneficiary of the trust, so the wealth could be appointed to them at a future date without a GWR. Control can be exercised as to when benefit is passed on, and to whom. The value does not sit inside the estate of the original recipient, thereby potentially reducing the threat of the RNRB tapering away. Further planning can be achieved, where a discretionary trust has been established by way on a DoV or by a will, so that a discretionary beneficiary may be granted a loan rather than a direct distribution from the trust. This would mean that upon death their unprotected estate would be reduced by replenishing the loan from the trust, which sits outside their estate.
This is a marketing communication. Trusts, estate planning, mortgage, tax: Trusts, Estate planning, Buy to Let Mortgage, Taxation and Inheritance Tax Advice are not regulated by the Financial Conduct Authority. Tax: Tax treatment varies according to individual circumstances and is subject to change. Quilter Cheviot and Quilter Cheviot Investment Management are trading names of Quilter Cheviot Limited. Quilter Cheviot Limited is registered in England and Wales with number 01923571, registered office at Senator House, 85 Queen Victoria Street, London, EC4V 4AB. Quilter Cheviot Limited is a member of the London Stock Exchange and authorised and regulated by the UK Financial Conduct Authority and as an approved Financial Services Provider by the Financial Sector Conduct Authority in South Africa. Approver: Quilter Cheviot Limited 26 September 2025
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Can you tell the difference between a bare trust and a discretionary trust? Or a loan trust and a discounted gift trust?
For those new to the world of trusts, the sheer number of options available on their own can be daunting. So, here’s a quick explainer/refresher with some useful tips thrown in.
Not for everyone
Just as there is a wide range of trusts to choose from, there are a wide range of reasons why individuals would set up a trust. Trusts are often used by clients to transfer wealth out of their estates to minimise IHT, to ensure the desired people benefit from that wealth at the right time and in specific situations can also provide creditor protection.
Trusts are not for everyone - a comprehensive review of an individual’s circumstances is required before deciding if trusts are appropriate
What is a trust?
Trusts have been around for centuries. They are financial arrangements used to manage an array of assets from investments and cash to land and property. Trusts are created on behalf of an individual (the settlor) who has often set up a trust for the benefit of others (the beneficiary or beneficiaries). To create a trust, the settlor hands over assets to those they trust (the trustees), who in turn look after the assets on behalf of the beneficiary/beneficiaries. Each trust has its own set of can dos, can’t dos and tax regimes. According to the type of trust, assets are treated differently to personally owned wealth from an income tax (IT), capital gains tax (CGT) and from an inheritance tax (IHT) perspective. Hence the key role trusts can play in financial planning.
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And then there were two
Numerous types of trusts exist but the majority of those created in one’s lifetime (inter-vivos trusts) as opposed to upon one’s death (will trusts) are - bare (also known as absolute) or discretionary trusts, or versions of them.
Understanding the differences between bare and discretionary trusts is key
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Taming the bare
Bare trusts are simple, but perhaps this is because they are inflexible. The beneficiary has the right to all of the capital and income of the trust at any time provided they are 18 or over in England and Wales, or 16 or over in Scotland. This is the case even though assets transferred into a bare trust by the settlor are held in the name of a trustee (a settlor can be a trustee). Beneficiaries are named at the outset and cannot be changed - therefore, bare trust assets will always go directly to the intended beneficiary.
Exercising discretion
With discretionary trusts, beneficiaries aren’t named. Trustees are guided by the settlor when assets are put into the trust, but the settlor effectively relinquishes control over how these are to be distributed. However, the settlor can be a trustee. It’s up to the trustees to determine, at a later date, that the right person gets the right money at the right time. Trustees can consider a wide class of beneficiary when deciding who should benefit. Trustees also decide whether income or capital gets paid out and how often payments are made. No one beneficiary has a claim on the trust’s income or capital.
Control and flexibility are two key areas of differentiation between bare and discretionary trusts – bare trusts, inflexible with settlors relinquishing control of assets beyond the age of majority; discretionary trusts, flexible with trustees controlling asset distribution at all times
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Other differences exist between bare and discretionary trusts, and these are detailed in the table below:
*Assuming no CLT in previous 7 years ** Certain transfers may be exempt, such as business relief qualifying assets after 2 years *** Reporting levels vary by asset class and previous gift history over the previous seven years
Trust-based variations
If bare and discretionary trusts are the building blocks of trust-based solutions, then the various other trusts provide the interior design that meets the specific needs of the settlor. For no two settlors are the same. Take Mr A and Mrs B. Mr A wishes to reduce the value of his estate by transferring a portion of his wealth to a trust. At the same time, he wants to retain the right to a pre-specified income stream. Mrs B is relatively young but is keen to take IHT mitigation steps now. As she is young, however, she doesn’t want to make any decisions today that are irrevocable in the future. Assuming the trust route is deemed appropriate for both individuals, Mr A and Mrs B would likely require different strategies. For Mr A, a discounted gift plan, which can be based on either a bare or discretionary trust, may be appropriate. This would allow Mr A to make withdrawals throughout the remainder of his life, provided there is sufficient capital in the trust to do so. Meanwhile, there would be an immediate reduction in the value of Mr A’s estate when the asset is transferred into the trust.
For illustrative purposes only
Mrs B by contrast could benefit from a loan trust. This effectively takes growth outside of the estate while still enabling Mrs B to access the original capital. As Mrs B ages, she is free to withdraw the outstanding value of the loan used to set up the trust. Loan trusts therefore might be of interest to individuals who, like Mrs B, are not close to retirement, but recognise that as asset wealth grows, so too does the IHT liability.
The above are just two examples of trust solutions that are available. Assuming trusts are deemed suitable for a client, trusts, such as the above, can be used to design solutions tailored to an individual’s needs and objectives.
A final question
This explainer opened with a series of questions, so it is fitting that it ends with one. Question: What links the above four useful tips? Answer: To ascertain if trusts are appropriate, to understand the various options available, and to ensure a trust solution matches a client’s individual needs, expert advice should be sought. This way, the world of trusts can be navigated and the benefits on offer reaped.
There’s no such thing as a one-size-fits-all trust solution
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Loan trust
Value £100k
Time
Growth outside the estate
Capital outside the estate
Discounted gift trust
Loan trust (with withdrawals)
Bare
Discretionary
Type of lifetime transfer
IHT payable initially
Taper relief
Ongoing IHT
Reporting for IHT purpose
Trust Registration Service (TRS) required where trusts are expressly created
Beneficiaries
Change of beneficiaries
Death of beneficiary
Settlor as trustee
Potentially exempt transfer (PET)
Up to the Nil Rate Band (NRB) - Nil
Can apply after 3 years for transfers > NRB
Above the NRB - NIL
X
If settlor dies within 7 years of gift
√
Named
Not possible
Beneficiaries interest forms part of their estate inc. when settlor is alive
Possible
Chargeable lifetime transfer (CLT)
Up to the NRB* - Nil
Above the NRB**– 20%
Periodic and exit charges may apply**
When above reporting levels***
Named or unnamed, including classes and those yet to be born
Policy not in beneficiaries’ estate
This material is not tax, legal or accounting advice and should not be relied on for tax, legal or accounting purposes. Quilter Cheviot does not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting adviser(s) before engaging in any transaction. Tax treatment varies according to individual circumstances and is subject to change. Approver: Quilter Cheviot Limited, 13 November 2025
