Estate Planning UK: A Complete Guide to Trusts, Wills and Inheritance Tax 2025/26

March 13, 2026

Effective estate planning is about more than minimising tax. It is about making sure the right assets reach the right people at the right time. This guide covers Wills, inheritance tax, trusts, gifting and lasting powers of attorney for the 2025/26 tax year.

Planning for what happens after you are gone is rarely a comfortable topic. Yet it is one of the most important financial exercises you will ever undertake. Without a plan, the wrong people may inherit your estate, a significant tax bill may reduce what you leave behind, and your loved ones could face stress and uncertainty at an already difficult time.

Estate planning is not just about tax mitigation. It is about ensuring the right assets reach the right people at the right time with minimal stress. This guide explains the key building blocks for UK residents in the 2025/26 tax year.

Why Estate Planning Matters

A well-structured estate plan protects the people you care most about. It can prevent family disputes, reduce the tax paid on your death and ensure that guardians are named for any minor children.

Without a plan, assets are distributed under the rules of intestacy — rigid legal rules that may not reflect your wishes at all. An unmarried partner could receive nothing. Estranged relatives could inherit significant sums. Proper planning avoids these outcomes.

The Importance of Having a Valid Will

A Will is the foundation, not the finish line, of a sound estate plan. It provides a clear instruction manual for your loved ones and significantly reduces the likelihood of family disputes.

A Will allows you to:

• Direct who inherits your assets and in what proportions
• Appoint guardians for any minor children
• Name executors to manage your affairs after death
• Include letters of wishes to guide trustees on matters not strictly covered by the Will itself
• Provide for unmarried partners who would otherwise receive nothing under intestacy rules

You should review your Will after any major life event — marriage, divorce, the birth of a child or a significant change in your financial circumstances. Executing a new Will after these events can protect your intentions and secure your family's future.

Understanding UK Inheritance Tax

Inheritance Tax (IHT) is often described as a voluntary tax, because proper planning can significantly reduce or eliminate it. Assets subject to IHT include property, savings, investments, personal belongings and certain gifts made within seven years of death.

Key IHT figures for 2025/26:

• Nil rate band: £325,000 (frozen until April 2031)
• Residence nil rate band (RNRB): £175,000 (frozen until April 2031)
• IHT rate above threshold: 40%
• Combined couple allowance: up to £1,000,000 tax-free (including RNRB)

Married couples and registered civil partners benefit from a significant advantage. Assets transferred between spouses on death are exempt from IHT. Any unused nil rate band from the first death can be transferred to the surviving spouse, potentially doubling the available allowance.

Agricultural and business assets may qualify for relief that reduces IHT liability by up to 100%. However, from April 2026 a cap of £2.5 million applies to combined business and agricultural assets eligible for 100% relief, with only 50% relief thereafter. Rules in this area are complex and professional advice is essential.

Using Lifetime Gifts to Reduce Inheritance Tax

One of the most straightforward ways to reduce your estate's value is through strategic gifting. Key exemptions include:

• Annual exemption: £3,000 per year, completely free of IHT
• Small gifts: up to £250 to any number of individuals, provided no larger gift has been made to the same person
• Wedding and civil partnership gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else
• Gifts from surplus income: regular gifts out of income that do not affect your standard of living can be fully exempt
• Charitable gifts: gifts to registered charities are fully exempt from IHT

Larger gifts made to individuals are known as Potentially Exempt Transfers (PETs). If you survive seven years from the date of the gift, the gift falls outside your estate. If you die within seven years, tapered relief may reduce the tax payable depending on when the gift was made.

Documenting all gifts is important, as it makes it easier for your executors to calculate any IHT liability that may arise.

How Trusts Can Protect Family Wealth

Trusts act as a safety deposit box for your family's future. They allow you to specify conditions on how assets are managed and distributed. For example, you may wish to leave money to a grandchild but not allow them to access it until they reach 25. A trust makes this possible.

When selecting trustees, choose people you trust implicitly to act in the best interests of your beneficiaries. Trustees carry legal responsibilities including record-keeping, tax reporting and asset management.

From a compliance perspective, most UK trusts are now required to be registered with HMRC's Trust Registration Service (TRS). Failure to comply can result in financial penalties. Professional advice is essential to ensure your trust is structured and maintained correctly.

Different Types of Trust Explained

The choice of trust determines not only how your wealth is distributed but also how well it is protected and what your beneficiaries ultimately receive. Common trust types include:

Discretionary Trusts

A Discretionary Trust grants wide powers to appointed trustees, enabling them to decide which beneficiaries (from a named class) receive income or capital, and when. No individual has an absolute entitlement, which can be invaluable if beneficiaries' needs are likely to change or if you wish to protect assets from divorce or creditors.

From a tax perspective, Discretionary Trusts are subject to the relevant property regime — an entry charge of up to 20% may apply when assets are placed in the trust above the nil rate band, plus periodic charges of up to 6% on each ten-year anniversary and exit charges when funds are transferred out.

Bare Trusts

Bare Trusts are the most straightforward. Assets are held by a trustee for a named beneficiary, who has an absolute right to both income and capital. Once the beneficiary reaches 18 (or 16 in Scotland), they can demand the assets outright. Bare Trusts are commonly used for gifts to children and can be very tax-efficient where beneficiaries have their own unused allowances.

Trusts for Vulnerable Beneficiaries

UK law provides special trust arrangements for disabled or vulnerable individuals. Income and capital gains within the trust may be taxed at beneficiary rates rather than the higher trust rates, and IHT may be mitigated — provided the trust meets HMRC's qualifying criteria. These trusts can also be structured to preserve means-tested benefit entitlements.

Interest in Possession Trusts

These trusts give a named beneficiary the right to income from the trust for their lifetime. The underlying assets are treated as belonging to the income beneficiary for IHT purposes, making them useful for certain succession planning arrangements.

Trusts for Joint Ownership and Property Planning

Trusts are widely used in property planning — including Declarations of Trust for unmarried couples who co-own property, and structures designed to ring-fence the family home from care fees or the risk of remarriage. Professional advice is essential to understand the interaction with deprivation of assets rules and local authority means-testing.

Planning for Incapacity: Lasting Powers of Attorney

Estate planning is not only about death. Planning for the possibility of mental incapacity is equally important. There are two types of LPA:

• Property and Financial Affairs LPA: covers bank accounts, investments, property and financial decisions
• Health and Welfare LPA: covers medical treatment, care home decisions and day-to-day wellbeing

LPAs must be registered with the Office of the Public Guardian before they can be used, a process that can take several weeks. It is wise to appoint more than one attorney and to specify clearly whether they must act jointly or may act independently.

An LPA is automatically void on the donor's death. It can also be revoked by the donor at any time while mental capacity remains. Putting LPAs in place gives peace of mind, ensuring your wishes are followed if you are unable to speak for yourself.

Estate Planning for Modern Families

Today's estate planning must account for the full complexity of modern family and financial life. Key areas include:

Digital Assets

Modern estate plans should address access to and the transfer of digital property — including online accounts, cloud storage, loyalty points and cryptocurrency holdings. Create a secure, up-to-date record and ensure your trustees or executors know how and where to find passwords and security keys. The law on digital assets is evolving and specialist input is increasingly important.

Overseas Property and Cross-Border Planning

Many families now hold assets in more than one country. UK rules on long-term UK residence and double taxation can be complex, and different countries have their own succession, tax and reporting regimes. If you own or stand to inherit overseas property, expert cross-border estate planning is essential.

Family Businesses

Family businesses require tailored succession plans that balance IHT efficiency with commercial continuity. This may involve business relief trusts, share buy-back provisions and family charters. The April 2026 changes to business property relief make early planning particularly important.

Pensions and IHT

Rules around pensions and IHT have come under scrutiny in recent years. Changes are expected from April 2027, which may bring unspent pension pots into the scope of IHT. Keeping your plan current ensures legislative shifts do not catch you off guard.

Common Estate Planning Mistakes

The most costly estate planning errors are often straightforward to avoid with timely professional advice:

• Not having a valid Will — leaving your estate subject to intestacy rules
• Underestimating the value of your property and investments, leading to an unexpected IHT bill
• Failing to use annual gifting exemptions consistently over time
• Ignoring the seven-year rule when making larger gifts
• Not reviewing your Will and estate plan after major life events
• Failing to put LPAs in place before mental capacity is lost
• Overlooking the IHT treatment of pension pots
• Not registering trusts with HMRC's Trust Registration Service
• DIY estate planning — a mistake in a Will or trust rule can cost your estate thousands of pounds

A financial plan is a living document. It must evolve as your life evolves to remain effective.

Frequently Asked Questions

What is the inheritance tax threshold in the UK for 2025/26?

The standard nil rate band is £325,000, frozen until April 2031. An additional residence nil rate band of £175,000 applies when a main residence is passed to direct descendants. Married couples and civil partners can combine their allowances, giving a potential combined threshold of up to £1 million. Anything above the threshold is generally taxed at 40%.

How can gifting reduce inheritance tax?

Gifts made more than seven years before death are generally exempt from IHT. You can also make use of the annual £3,000 exemption, small gifts of up to £250 per person, regular gifts from surplus income and wedding gifts. Gifts to charity are fully exempt. All gifts should be documented to help your executors calculate any liability that may arise.

What is a discretionary trust?

A Discretionary Trust grants your appointed trustees the power to decide which beneficiaries receive income or capital, and when. No single beneficiary has an automatic entitlement. This makes discretionary trusts particularly useful where flexibility is important — for example, where beneficiaries' circumstances may change or where you wish to protect assets from divorce proceedings or creditors.

Why do I need a Lasting Power of Attorney?

Without an LPA, if you lose mental capacity, your family has no automatic right to manage your finances or make healthcare decisions on your behalf. They would need to apply to the Court of Protection, which is a lengthy, expensive and stressful process. An LPA puts trusted people in place to act for you before a crisis arises.

Do trusts need to be registered with HMRC?

Yes. HMRC's Trust Registration Service now applies to nearly all new and existing UK trusts. Trustees must maintain accurate records and ensure compliance. Non-compliance can result in financial penalties. Specialist advice is strongly recommended when establishing or administering a trust.

For a complete overview of year-end tax planning, read our Guide to Year-End Tax Planning 2025/26. You may also find our article on smart gifting and IHT planning useful.

Is your legacy protected? Contact Off Piste Wealth to discuss your estate planning strategy and protect your family's financial future.