Passing wealth to your heirs requires strategic planning to minimise the impact of inheritance tax (IHT). Utilising a gift trust is an effective method for preserving wealth for beneficiaries while mitigating their potential tax burden.
In this guide, we’ll discuss how UK expats can leverage gift trusts to protect and grow their assets and support beneficiaries at home and abroad.
What You Will Learn
- What is a gift trust, and how does it work?
- What are the tax implications of different gift trust structures?
- How does establishing a gift trust benefit expats?
- What are the steps involved in setting up a gift trust?
What Is a Gift Trust?
A gift trust is a legal arrangement that allows you to distribute wealth to beneficiaries in lump sums without incurring inheritance tax or increasing the value of your taxable estate.
There are three parties involved in a gift trust:
- The settlor: The individual who wishes to pass on their assets, like cash, stocks, or properties, via gifts in trust.
- The trustee: The person the settlor appoints to manage and distribute the assets held in trust. There can be more than one trustee, but appointing at least two is recommended in case one becomes unavailable.
- The beneficiary: The individual or entity entitled to receive income or capital from the trust, as determined by the settlor or trustees.
A trust can hold cash or existing assets such as stocks, mutual funds, property, and investment bonds.
The assets you place in a gift trust for the benefit of your beneficiaries typically won’t count as part of your estate for tax purposes after seven years. Earnings generated from the trust are excluded from your estate for IHT purposes from the outset.
By utilising a trust, you can specify the conditions for distributing your assets; depending on the chosen gift trust structure, you can make an exclusive gift or retain some access to the trust.
When Can Expats Use a Gift Trust?
As an expat, establishing a gift trust may be a financially strategic choice in the following circumstances:
- The net value of your estate exceeds the tax-free nil-rate band of £325,000.
- You want to reduce inheritance tax liabilities on assets passed to your heirs.
- Your gift is intended for beneficiaries under the age of 18.
- You want to include future children or grandchildren as beneficiaries.
- You wish to provide income for a surviving spouse or partner while restricting their ability to transfer the underlying assets.
- You want to retain control over how the gifted funds are invested, when they are distributed, and to whom.
Important:
As of 6 April 2025, UK expats who qualify as long-term residents – defined as individuals who have been UK tax resident for at least 10 of the previous 20 tax years – may be subject to UK inheritance tax on worldwide trust assets, even if the trust is administered offshore. This change significantly impacts IHT exposure for expats and should be factored into any gift trust strategy.
What Are the Main Types of Gift Trusts?
There are three main types of gift trusts you can establish, depending on your financial priorities and the desired level of control:
- Absolute gift trust
- Discretionary gift trust
- Discounted gift trust
Absolute Gift Trust
An absolute gift trust allows you to make an irrevocable transfer of an asset or a portion of it to specific beneficiaries. After the trust is created, you cannot change the named beneficiaries or alter any other part of the arrangement.
Gifts in an absolute trust qualify as potentially exempt transfers (PETs), meaning they won’t incur immediate IHT liabilities. They may be exempt altogether if you survive for at least seven years after making the gift.
Under an absolute structure, a beneficiary is entitled to the capital and any investment gains from it, and they can claim both at any time after they turn 18.
If a claim is made, the trustees are required to distribute the benefits. However, if the beneficiary doesn’t assert their right to take control of the assets, the trustees may continue to manage the trust on their behalf.
Discretionary Gift Trust
When using a discretionary trust, there are no fixed beneficiaries with absolute rights to the assets. Beneficiaries can only receive benefits when and if the trustee decides to allocate a portion of the assets to them.
The trustees exercise discretion regarding how the assets are distributed, who receives benefits, and when the payments are made based on what they deem appropriate at the time. They may consider your wishes when distributing the trust’s funds, but are not legally obligated to follow them.
Discretionary trusts are flexible, making them convenient for transferring assets to a larger group of beneficiaries whose specific needs or circumstances may change over time.
Gifts in a discretionary trust are treated as chargeable lifetime transfers (CLTs), which means that if they exceed the current nil-rate band (NRB) of £325,000, they will be subject to an immediate IHT charge. The sum of other CLTs you made in the seven years preceding the creation of the discretionary trust will be subtracted from your NRB.
Additionally, periodic IHT charges of up to 6% will be imposed on the trust every 10 years if its value exceeds the NRB at the time. If the trust is distributed after 10 years, exit charges will also apply. They are based on the rate of the last periodic charge and the time passed since that charge.
Discounted Gift Trust
With a discounted gift trust arrangement, you’re granted limited access to the assets through fixed, regular payments during your lifetime or until the invested capital is exhausted.
A discounted gift trust enables you to obtain an immediate reduction in estate value for inheritance tax purposes while drawing income (typically up to 5% of the invested amount annually) from the trust to support your ongoing expenses.
Discounted gift trusts can be established as absolute or discretionary trusts. When you die, the trustees will distribute the capital left in the trust to your beneficiaries as instructed.
Before setting up the trust, you must determine the timing and level of payments you want to receive; once established, these details cannot be changed.
The true value of the retained benefits or payments will be calculated based on factors such as your health status and life expectancy. The discount will then be deducted from the value of the investable capital entering the trust, and the balance will be the discounted gift.
If you survive for seven years after creating the discounted gift trust, the discounted gift will be removed from your estate and exempt from inheritance tax.
What Is the Process of Establishing a Gift Trust?
The process of transferring assets into a trust as a gift for your beneficiaries typically includes the following steps:
- Select your preferred trust structure.
- Appoint your trustees.
- Prepare the trust deed.
- Update relevant information.
Select Your Preferred Trust Structure
The type of gift trust you intend to establish will determine the terms of your deed and the documentation required. While granting precision and certainty, a rigid trust structure can prevent you from modifying the agreement to account for evolving circumstances.
A flexible structure enables you to plan for a larger group of beneficiaries and prospective events, but final decisions regarding the distribution of benefits are based on the trustees’ discretion.
Seeking the guidance of a financial advisor, like those at Titan Wealth International, ensures you select a structure that optimises your inheritance tax position and investment growth, taking into account your financial situation and intentions.
Appoint Your Trustees
As the fund settlor, you may also act as one of its trustees, provided you appoint at least one other person. In case death or ill health prevents you from fulfilling your responsibilities, the other trustee will manage and distribute the assets according to your instructions.
Your trustees can be your friends or family members, but you can also appoint professional trustees or an organisation.
As a qualified neutral party, they will make informed investment and administrative decisions, act in the best interests of beneficiaries, and maintain objectivity when distributing assets. This can eliminate or reduce trust disputes, mismanagement, and tax liabilities.
Prepare the Trust Deed
To draft a trust deed that suits your requirements and complies with relevant laws, it’s advisable to partner with a legal expert or financial advisor specialising in expat estate and tax planning.
Based on your choice of gift trust, the deed will provide crucial information about the terms of the trust, such as:
- Names, nationalities, dates of birth, and residential countries of the settlor, beneficiaries, and trustees.
- The name, country, and address of the trust and of other entities involved, such as corporations or charities.
- Descriptions and values of the assets to be placed in the trust.
- The national insurance number, unique taxpayer number, or address for each settlor, trustee, or beneficiary. If a party’s address is not in the UK, a passport or identification card must be provided.
- Details of the trust’s liability for income tax or capital gains tax.
- The conditions that will determine how and when the gift in the trust will be shared.
- The scope and limitations of the powers and responsibilities of trustees.
Once the deed has been drafted, it must be signed by you and your trustees in the presence of neutral witnesses.
Gift trusts must be registered with His Majesty’s Revenue and Customs (HMRC) under the Trust Registration Service (TRS), unless the trust qualifies for an exclusion. Common exclusions include:
- Trusts holding assets of a registered pension scheme
- Trusts holding protection policies that only pay out on death, terminal illness, or disability (not investment bonds or discounted gift trusts)
- Co-ownership trusts with the same legal and beneficial owners
- Trusts for disabled persons as defined under Schedule 1A of Finance Act 2005
Important 2025 Update: If the trust becomes liable for UK tax, including inheritance tax or capital gains tax, it must be registered – even if it otherwise qualifies as an excluded trust.
Moreover, from 6 April 2025, trusts settled by UK long-term residents (LTRs) can be subject to UK inheritance tax on worldwide assets, even if the trustees and assets are offshore.
Update Relevant Information
Without adequate funding, your gift trust won’t be viable, and your beneficiaries may be required to undergo the probate process to claim their benefits. Ensure that the assets are legally transferred to the trust and all relevant documents are kept up-to-date.
What Are the Tax Implications of Gift Trusts?
The tax consequences of a gift trust in the UK can vary according to:
- Your domicile or tax residency status
- The type of trust used
- The party liable for tax—the trustees or beneficiaries
- Your gifting history
- The value of the gifts in trust
- The length of time you live after the trust was created
The table below details when and how taxes will apply to your gift trust:
| Gift Trust Type | Tax Type | Tax Rate | When It Applies |
|---|---|---|---|
| Absolute trust | Inheritance tax | 0% | If you remain alive for seven years after creating the trust |
| 8%–40% | On the gift amount exceeding the NRB, if you die within 1–7 years of making the trust gift | ||
| Discretionary trust | Inheritance tax charges | 0% | If the sum of cumulative CLTs in the previous seven years is below the NRB |
| 20% | Payable immediately if the value of gifts being transferred into the trust and the cumulative sum of CLTs made within the last seven years surpass the NRB | ||
| 6% | On the value of property valued at every 10-year anniversary, if the value exceeds the NRB | ||
| Income tax | 39.35% | On dividend income | |
| 45%, minus a 25% tax credit | On other income generated from investments in the tax year of your death or during the time you’re considered non-UK domiciled (if your trustees are UK residents) | ||
| Marginal tax rate | If your trustees don’t reside in the UK | ||
| Discounted trust | Inheritance Tax | 0% | On the discounted portion (actuarially calculated to exit your estate immediately) |
| 8–40% | On the non-discounted portion if you die within 1–7 years of setting up the trust | ||
| 20% | Immediate CLT charge on the excess over the NRB at setup (if structured as discretionary trust) | ||
| 6% | 10-year periodic charge (if discretionary and value exceeds NRB) | ||
| Income tax (on trust income) | Up to 45% | On income generated from trust assets, depending on structure and trustee residency. |
Trustees can defer an income tax charge for the tax year if the amount withdrawn from a bond and used to make payments to beneficiaries doesn’t exceed 5% of the initial investment value.
What Are the Benefits of Setting Up a Gift Trust Fund as an Expat?
When utilised correctly, a gift trust provides the following benefits for expats:
| Benefit | Description |
|---|---|
| Lump sum distributions | Using a gift trust allows UK tax residents to bypass the annual tax-free gift limit of £3,000. |
| Immediate reduction in estate value | If you opt for a discounted gift trust, the discount you receive will fall outside of your taxable estate, thereby eliminating or reducing future inheritance tax liabilities. |
| Improved tax optimisation | An inheritance tax charge of 40% is applied on the value of your estate above the NRB, but assets in a gift trust are exempted from this tax if you don’t die within seven years of creating the trust. Depending on whether you use an absolute or discretionary gift trust structure, IHT liabilities can be avoided completely or reduced by half. |
| Customisable access | You can choose to relinquish total ownership of the assets in the gift trust or reserve the right to access a portion of the assets throughout your lifetime. |
| Enhanced privacy | Gift trust terms are private and typically only known by the parties involved in the trust. |
| Easier asset transfer | Your beneficiaries can avoid the lengthy probate process or legal disputes, enabling them to take ownership of the assets you’ve left them without delays. As long as one or more of your trustees can administer the trust when needed, assets can be quickly distributed. |
Book Your Gift Trust Strategy Free Consultation
Establishing a gift trust as an expat can preserve family wealth, reduce inheritance tax, and streamline cross-border succession. In a complimentary consultation with Titan Wealth International, you will:
- Discover which gift trust structure best suits your estate planning goals.
- Learn how new 2025 long-term residence rules affect trust-based inheritance tax exposure.
- Receive a personalised estate planning strategy that safeguards global assets for future generations.
Key Takeaway
High-net-worth expats often have more nuanced estate planning requirements and tax liabilities, which can be efficiently managed by using gift trusts as a vehicle for wealth transfer.
In this guide, we’ve outlined the process of establishing gift trusts, the individuals who may benefit most from them, and the tax consequences of holding gifts in absolute trusts vs. discretionary trusts.
Our financial advisers at Titan Wealth International can assess your financial priorities and recommend the best trust structures for protecting your assets and securing your family’s financial future.
We provide tailored guidance to help you navigate complex compliance requirements, optimise tax efficiency, avoid common pitfalls when establishing a trust, and manage any unique liabilities that may arise due to your tax residency status.
