Protecting your assets during your lifetime

Estate planning is not only about what happens after you die. Some of the most useful steps you can take are the ones you take now, while you are well and able to make your own decisions.

Giving assets away during your lifetime is one of them. Done carefully, it can reduce Inheritance Tax and keep family money where you intend it to stay. Done without thought, it can create problems that are difficult to undo.

Why lifetime gifts can help

Most gifts you make to another person are treated as potentially exempt transfers. If you live for seven years after making the gift, it falls outside your estate completely and no Inheritance Tax is due on it.

If you die within seven years, the gift is brought back into the calculation. Taper relief can reduce the tax, but only on the part of your gifts that sits above your nil rate band. That is a detail many people miss.

Some gifts are exempt straight away and do not depend on surviving seven years:

• Up to £3,000 in total each tax year, with one year of unused allowance able to be carried forward
• Small gifts of up to £250 per person per year
• Wedding and civil partnership gifts, within set limits
• Regular gifts out of surplus income, provided they do not affect your standard of living
• Anything given to a husband, wife or civil partner

There was a good deal of speculation before the Autumn 2025 Budget that these rules would be tightened. In the event, none of them changed. The seven-year rule is still in place.

The catch with giving assets away outright

Once you give something to someone outright, it is theirs. That sounds obvious, but the consequences are easy to overlook.

The asset now sits in their estate rather than yours. It is exposed to whatever happens in their life, including a divorce settlement, a business failure or a claim from a creditor. It may add to their own Inheritance Tax bill in due course, and it will be counted if they ever need to pay for care themselves.

They can also simply spend it. Once the gift is made, you have no say in what happens next.

How a discretionary trust works differently

A discretionary trust offers a middle path. You make the gift, so the asset leaves your estate, but it does not land in anybody else’s.

Instead it is held by trustees for a group of beneficiaries you name, which will usually include your children, your grandchildren and generations not yet born. No individual beneficiary owns a fixed share, so in most cases there is nothing for a divorcing spouse or a creditor to claim against.

The trustees decide who benefits, how much they receive and when. You can leave a letter of wishes to guide them, and it is worth being clear about what that does. A letter of wishes is not legally binding. The trustees must take it into account, but the decision remains theirs, and that discretion is exactly what gives the trust its protective effect.

You cannot keep the benefit and the tax saving

This is where lifetime planning most often goes wrong.

If you give something away but carry on enjoying it, HMRC treats it as a gift with reservation of benefit. The asset is counted as part of your estate when you die, however long ago the gift was made. Giving away the house you continue to live in is the obvious example.

The same principle applies to trusts. If you or your spouse can benefit from the trust, the reservation of benefit rules bite and the Inheritance Tax saving disappears. In some situations a separate income tax charge on pre-owned assets applies instead.

You can usually act as one of the trustees, which keeps you involved in how the trust is run and what it invests in. What you cannot do is keep access to the money.

How much can go into a trust

Gifts into a discretionary trust are treated differently from gifts to individuals. They are chargeable lifetime transfers, which means they are assessed when you make them rather than only if you die within seven years.

You can settle up to your available nil rate band without an immediate charge. Anything above that attracts a 20% charge at the point the trust is created.

Your nil rate band becomes available again after seven years, so for larger estates the exercise can be repeated. A married couple each have their own nil rate band, which doubles what can be done between them.

Trusts also have their own ongoing Inheritance Tax treatment. There is a charge of up to 6% on the value above the nil rate band at every ten-year anniversary, and a proportionate exit charge when capital is paid out to a beneficiary. For many family trusts the actual figure works out at nil or close to it, but it should be understood before you start rather than discovered later.

What you can put into a trust

Cash and investments are the most straightforward. Property can work too, including a second home, a rental property or a share in a property.

The home you live in is the hardest case, for the reservation of benefit reason set out above. There are arrangements that can work for couples, usually through their Wills rather than during lifetime, and that is worth a separate conversation.

Bear in mind that moving an asset into trust counts as a disposal for Capital Gains Tax, even though no money changes hands. Relief is often available to hold the gain over. If a property carries a mortgage, Stamp Duty Land Tax can also come into play. None of this is a reason not to proceed. It is a reason to check the position properly first.

Care fees work to a different set of rules

People often assume the seven-year rule applies to care costs in the same way it applies to Inheritance Tax. It does not.

A council assessing care fees can look at gifts made at any time. There is no seven-year cut-off.

When a local authority carries out a financial assessment, it can look at transfers made at any point in the past. There is no time limit at all. What matters is whether avoiding a contribution to care costs was a significant reason for the transfer, and whether needing care was something you could reasonably have anticipated at the time.

If a council concludes that a gift was made deliberately to reduce a care bill, it can treat the asset as though you still own it. This is known as deprivation of assets.

That is not an argument against planning. It is an argument for planning early, for sound reasons, and for keeping a record of why the decision was made.

A trust needs looking after

A trust is an ongoing arrangement rather than a one-off piece of paperwork. Most UK trusts have to be registered with HMRC’s Trust Registration Service within 90 days of being created, the register has to be kept up to date, and the entry is reviewed each year.

Trustees have legal duties, may need to file tax returns, and will need to deal with the ten-year anniversary when it comes round. We explain all of this at the outset and set the trust up so that the people running it know what is expected of them.

What is changing

Two things are worth keeping in view.

From April 2027, most unused pension funds will count as part of your estate for Inheritance Tax. For a lot of people this changes the order in which they should draw on their savings in retirement. If you are married, a trust is not the answer to this one, because anything passing to a surviving spouse or civil partner is already exempt. The question is what happens on the second death.

The nil rate band and the residence nil rate band are both frozen until April 2031. As property values in Caversham and the surrounding villages continue to rise, more ordinary family estates are drawn into Inheritance Tax without anything about them having changed. That is the main reason lifetime planning is being looked at more often than it used to be.

Come and talk it through

Whether a lifetime gift or a trust is right for you depends on what you own, who you want to look after, and what you are likely to need yourself in the years ahead. It is not a decision to make from a website.

We are at Church House on Church Street in Caversham, by the Waitrose mini roundabout, and we see people face to face. There is no charge for an initial conversation and no obligation to take it further.

Call 0118 948 4381, email info@templarestateplanning.co.uk, or use the contact form to arrange a time.

This article explains how the rules work in general terms. It is not personal advice, and figures are correct as at September 2026.