Trusts, Tax and Intergenerational Wealth, using trusts for estate planning

With so many tax changes for businesses and families, it is becoming harder to ignore the direction of change in the UK.

Taxes are rising, allowances are being frozen, and more families are finding themselves drawn into the tax system than ever before. Inheritance tax thresholds remain unchanged, income tax bands are frozen, and capital gains tax allowances have been dramatically reduced. At the same time, property values and investment portfolios have continued to grow.

The result is a growing number of families who would never have described themselves as “wealthy” now facing real tax exposure. Our job at Smith & Pinching is to help you understand the implications of change and how to mitigate tax impacts.

Recent changes have caused a resurgence in conversations around intergenerational planning, which is becoming increasingly important.

Is Now a Good Time to Review Your Strategy?

One tool often used in this type of planning is a trust. Trusts can be an effective way to manage tax liabilities when used correctly.

Using trusts for intergenerational estate planning

Before diving into trusts themselves, it’s worth reframing the conversation.

Good intergenerational planning is not solely about reducing taxes. It’s about:

• Protecting family wealth
• Controlling how and when assets pass to the next generation
• Supporting children or grandchildren responsibly
• Balancing fairness, flexibility and security

Trusts can play an important role here, but only when used for the right reasons and in the right circumstances. Your Smith & Pinching Financial Adviser will provide support and guidance based on your individual circumstances and goals.

As wealth managers who specialise in generational wealth planning for families, we see trusts as one of many tools available — not something to be used automatically or in isolation.

What is a trust, in simple terms?

At its core, a trust is a legal arrangement where assets are held by trustees for the benefit of beneficiaries, under rules set out by the person creating the trust (the settlor).

The key feature of a trust is control.

Rather than assets passing outright to an individual, they are held within a structure that can:

• Protect assets from misuse or loss.
• Control timing and access.
• Provide flexibility as circumstances change.
• Potentially reduce future tax exposure.

The benefits of using trusts in financial planning

Trusts represent an opportunity; when used appropriately, they can offer several advantages.

Control

Trusts allow you to decide how wealth is used, rather than simply who receives it. This can be particularly valuable where beneficiaries are young, vulnerable, or simply not ready to manage significant sums responsibly.

Flexibility

Many trusts allow trustees to adapt decisions over time, responding to changes in family circumstances, tax rules, or beneficiaries’ needs.

Asset protection

Assets held in trust may be better protected from divorce, bankruptcy, or poor financial decisions by beneficiaries.

Tax planning

While trusts are not a magic solution, they can help mitigate inheritance tax and improve long-term tax efficiency when used as part of a broader strategy.

Common types of trusts used in family wealth planning

There are many types of trusts, each designed for different planning objectives. Some of the most commonly used include:

Discretionary trusts

Discretionary trusts give trustees full discretion over how and when beneficiaries benefit.

They are often used where flexibility and control are paramount — for example, when supporting multiple generations or where future circumstances are uncertain. They can be particularly effective for long-term family planning, but come with more complex tax considerations.

Interest in possession trusts

In an interest in possession trust, one beneficiary has a legal right to income (or the use of an asset), while others are entitled to the capital at a later date.

These are commonly used in family situations involving:

• Second marriages.
• Blended families.
• Providing for a spouse while preserving capital for children.

Discounted gift trusts

A discounted gift trust allows an individual to gift capital into a trust while retaining the right to regular withdrawals.

For inheritance tax purposes, part of the gift is treated as immediately outside the estate, while the retained income provides ongoing access to funds. This can be useful for those wanting to reduce estate value without giving up financial security.  However, you should note that the effectiveness of the discount depends on factors such as age and health.

Flexible reversionary trusts

Flexible reversionary trusts are often used by couples. They allow income to be paid to one spouse initially, with the option to revert it to the other if circumstances change.

This flexibility can be helpful in retirement and later-life planning, particularly when balancing income needs with inheritance tax objectives.

Loan trusts

With a loan trust, capital is loaned into trust rather than gifted outright.

The original loan remains part of the estate, but any growth on the invested assets accrues outside the estate for inheritance tax purposes. This can be an effective strategy for individuals who are uncomfortable with permanently giving capital away but want future growth to benefit the next generation.

Key planning points when considering a trust

Trusts are powerful, but they are not simple or easily unwound. Before proceeding, several important principles should be kept in mind.

No trust without a plan

A trust should never be set up in isolation. A robust financial plan should explain why a trust is worth considering, how it fits with your wider objectives, and the trade-offs involved.

Involve the next generation where appropriate.

Open dialogue with children or beneficiaries can be incredibly valuable. It helps manage expectations, reduces future conflict, and ensures that wealth supports — rather than undermines — family relationships.

Professional advice is essential.

Trusts are legally and tax complex. Once established, they can be difficult and costly to change. Taking professional advice ensures they are structured correctly, aligned with your goals, and coordinated with your wider estate and financial planning.

A final thought

In a world of rising taxes and increasing complexity, trusts remain a valuable planning tool for many families, but only when used thoughtfully.

The aim is not simply to pass on wealth, but to do so in a way that reflects your values, protects your family, and provides flexibility for an uncertain future.

As with all good financial planning, the right solution starts with understanding the bigger picture.

Get in touch with us to discuss your individual situation and the right steps for your circumstances.