Estate planning for retirement – using trusts and lifetime gifts

Many people review their finances when planning for retirement, but estate planning is often overlooked. Taking action early can help reduce the inheritance tax (‘IHT’) payable on death while allowing you to see your wealth benefit future generations during your lifetime.

Retirement: the ideal time to review your estate

Effective estate planning generally involves reducing the value of your estate for IHT purposes. While spending assets is one way to achieve this, many people would prefer to pass surplus wealth to family members instead.

Retirement planning often involves assessing how much income and capital will be needed to maintain your desired lifestyle. If you identify assets that are unlikely to be required, you may wish to consider transferring wealth to future generations in a tax-efficient manner.

This is particularly relevant given the upcoming changes to pension taxation. From 6 April 2027, unused pension funds will generally form part of an individual’s estate for IHT purposes, increasing the importance of reviewing wider estate planning arrangements sooner rather than later.

Passing on wealth during your lifetime

Making gifts during your lifetime can be an effective way to reduce the value of your estate. Gifts within your available nil rate band (‘NRB’) (currently £325,000) can generally be made without an immediate IHT charge.

However, there are some practical limitations:

1. You need sufficient assets to maintain your own financial security.
2. Most outright gifts only become fully exempt from IHT if you survive for seven years.
3. The gift must be genuine – continuing to benefit from gifted assets can result in HMRC treating them as still forming part of your estate.

If you die within seven years of making a gift, its value may be brought back into account for IHT purposes and reduce the NRB available on death. While taper relief can reduce IHT after three years, its impact is often limited.

For this reason, it is important to make use of the following valuable automatic exemptions:

• Annual exemption

You can gift up to £3,000 each tax year, without IHT becoming due.  Any unused exemption can be carried forward for one tax year.

• Gifts from excess income

Regular gifts from excess income can pass immediately free of IHT.  Provided you establish a pattern of giving and can prove your income exceeds your expenses in the year of the gift, these amounts are IHT exempt.

• Small gifts

You can gift up to £250 per tax year to any number of individuals, provided no other IHT exemption applies to the same recipient.

• Gifts for weddings and civil partnerships

If someone in your family and friendship circle is getting married, you can gift up to £5,000 to a child; £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else – free of IHT – conditional upon the marriage or civil partnership taking place.

• Charitable gifts

Donations to registered charities are always IHT-free, whether made in lifetime or on death.

Using trusts to protect and control assets

Trusts can complement retirement and estate planning by allowing assets to be managed, protected and distributed in a controlled way during your lifetime and after death.

For most lifetime trusts, including discretionary and interest in possession trusts, assets can be transferred up to your available NRB without triggering an immediate IHT charge. Amounts above this threshold will generally be subject to a 20% lifetime IHT charge and could be taxed at 40% if you die within seven years. Trusts may also be subject to periodic and exit charges.

The most suitable trust will depend on your objectives, beneficiaries and their respective tax treatment.

• Discretionary trusts

Trustees decide how and when assets are distributed among beneficiaries. These trusts offer significant flexibility and can provide protection against risks such as divorce, creditor claims and financial vulnerability.

• Interest in possession trusts

One beneficiary (called the ‘life tenant’) is entitled to the trust income during their lifetime, while the capital is ring-fenced for other beneficiaries later. They are commonly used in second-marriage situations where provision is required for a surviving spouse while preserving assets for children from an earlier relationship.

• Bare trusts

Beneficiaries become absolutely entitled to the trust assets at age 18 and are often used to hold assets for children or grandchildren. They can be useful for funding education costs but have limited flexibility.

• Vulnerable persons trusts

These trusts are designed for beneficiaries with disabilities or other vulnerabilities, providing long-term financial management and potentially favourable tax treatment.

Key takeaways

Retirement planning should involve more than reviewing pensions and investments. A broader assessment of your wealth can help identify opportunities to make gifts or establish trusts that reduce IHT exposure and benefit future generations.

If you are planning for retirement and would like to discuss your estate planning options, please contact our personal tax and succession team. We can help you identify the most appropriate approach for your circumstances.