Inheritance tax - giving your money away and retaining control
Peter McGahan
Monday 19th October, 2026.
THE government’s change in terms of bringing pensions into the realms of inheritance tax is like your friend charging you for your birthday present.
Giving money away is easy. Bank transfer, press send, done. Happy days. For someone.
The difficult bit is giving it away and still caring very much what happens next.
That is where a gift trust can be useful. I covered Discounted Gift Trusts last week but there are other benefits to trusts. You genuinely give the money away, so you cannot reach back into the pot later because the kitchen needs replacing, or the cruise suddenly looks irresistible. But, depending on the trust, you can retain a degree of control over who benefits, when they benefit and how much they receive.
That’s the clever bit. Control is not access.
The settlor can often also be a trustee, but trustees do not own the money for themselves. They control and administer it under the trust deed and for the beneficiaries. If you still need the capital for your own future, a gift trust is probably answering a question you should not yet be asking.
There are two common routes: Absolute and Discretionary Gift Trusts. Stay with me.
With an Absolute, or Bare Trust, the beneficiary is fixed from the beginning. In England and Wales, once that beneficiary reaches the age 18, they can generally demand the trust assets. The trustees cannot decide that young Freddie has developed an alarming relationship with sports cars and substitute his more sensible sister instead. Sadly!
For inheritance tax, a lifetime gift into an absolute trust is normally a Potentially Exempt Transfer (PET). Survive seven years from the gift and the PET normally becomes exempt from inheritance tax. Die within those seven years and it is brought back into the inheritance calculation, subject to the detailed rules.
That simplicity can be attractive, particularly where you know exactly who should benefit. It is less attractive if the whole point is flexibility.
A Discretionary Gift Trust works differently. Instead of one beneficiary having an absolute entitlement, the trustees choose among a class of potential beneficiaries, deciding who receives what and when.
This can be very useful in real families, which inconveniently refuse to behave like neat tax-planning diagrams. Long sigh.
Imagine grandparents with three children and five grandchildren. One child is separating from a spouse and is hopeless with money. Another is financially secure. One grandchild may need help with university, another with a house deposit, while a vulnerable grandchild may require support over a much longer period.
Give everyone cash outright and the planning finishes the second the bank transfer clears. A Discretionary Gift Trust, however, allows the trustees to respond to what actually happens.
A letter of wishes can guide them. It does not replace the trust deed or bind the trustees in the same way, but it can explain what the settlors were trying to achieve. Think of the trust deed as the rules and the letter of wishes as the compass.
There is, naturally, a tax trade-off for that flexibility.
A transfer into a typical Discretionary Gift Trust is normally a chargeable lifetime transfer rather than a PET. An immediate inheritance tax charge can arise where the transfer, together with relevant earlier chargeable transfers, exceeds the available nil-rate band, currently £325,000. The trust may also face inheritance tax charges at 10-year anniversaries and when assets leave it.
So “put it in trust and save inheritance tax” is not a financial plan. It is the beginning of a financial plan with a few pages missing.
Gift trusts can also be useful for intergenerational planning. Rather than handing a grandchild a large sum simply because a birthday has arrived, trustees can help with education, a first home or other needs at appropriate times. Discretionary trusts can also be valuable where a beneficiary is vulnerable, although the interaction with means-tested benefits, care funding and the special tax rules for vulnerable beneficiaries needs specialist advice. Do not assume that putting money into a trust makes it invisible to every assessment.
And the trust is not the investment. The trust tax wrapper. Inside that, the most effective investments are then chosen.
For me, that is the real attraction of a gift trust. It can be an inheritance tax planning tool, but tax is only half the story. The other half is control, timing and retaining flexibility when you cannot possibly know what your family will look like in 10, 20 or 30 years.
Just remember the bargain.
You can give the money away and retain some influence over its journey.
You cannot give it away and keep it for yourself.
I’m writing a guide to inheritance tax planning. If you would like a complimentary copy, please email info@wwfp.net and one will be sent to you when it is ready.
Peter McGahan is the Chief Executive Officer of Independent Financial Adviser Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.
