HMRC is contacting some trustees after identifying possible errors in recent Trust and Estate tax returns relating to the type of trust being reported.

The latest HMRC compliance campaign focuses on trusts where box 8.15 of the Trust and Estate Tax Return was ticked to indicate that the trust is not an accumulation or discretionary trust. HMRC says its records suggest that some of these trusts may in fact fall within this category and could therefore have been taxed at the wrong rates.

Accumulation and discretionary trusts generally pay Income Tax at special rates of 39.35% on dividend-type income and 45% on other income, compared with lower rates for many other trusts. Some discretionary trusts are exempt from the special trust rates.

Trustees receiving a letter should review each relevant tax return and respond to HMRC by 2 November 2026. If the returns are correct, HMRC should be told. If additional tax is due for 2024-25, the return should be amended and the tax paid. Earlier years may require a voluntary disclosure to be made. There may be interest to pay and, depending on the circumstances, a penalty may also be due.

Trustees should also check that the trust's details on the Trust Registration Service remain accurate. HMRC requires trustees to keep relevant information up to date, including changes to beneficiaries.

If you receive one of these letters we can help you review your position and advise on the appropriate action.

After someone dies, the beneficiaries may find that the way an estate has been distributed does not reflect their wishes or the family’s circumstances. A Deed of Variation can allow beneficiaries to change how inherited assets are passed on and, in some cases, can help reduce the amount of tax payable. It is important to note that any beneficiaries who would receive less as a result of the changes must agree to the alteration.

A Deed of Variation (also known as a deed of family arrangement) allows beneficiaries to redirect all or part of their inheritance. This could include passing assets to another family member, changing who receives certain assets, or placing assets into a trust.

For tax purposes, where the required conditions are met, HMRC treats the variation as if it had been made by the person who died. This means the redirected assets are generally treated as passing directly from the deceased rather than from the original beneficiary. This can be useful for Inheritance Tax planning and may also have Capital Gains Tax benefits.

To be effective for tax purposes, the variation must normally be made within two years of the date of death. It must be in writing and contain the required statements confirming that the relevant tax rules are to apply. All beneficiaries whose interests are affected must agree to the changes.

A Deed of Variation cannot be used simply to avoid tax after an inheritance has already been received. Before making any changes, beneficiaries should consider the wider tax and family implications.

Making gifts during your lifetime can be an effective way to reduce the value of your estate for Inheritance Tax (IHT) purposes.

One of the most commonly used exemptions is the annual exemption. This allows an individual to give away up to £3,000 each tax year without the gift forming part of their estate for IHT purposes. If the exemption is not used in full, any unused amount can be carried forward to the following tax year, although only for one year. This means that someone who made no qualifying gifts in 2025-26 could potentially give away up to £6,000 in 2026-27 free of IHT.

There is also a useful exemption for small gifts. You can give as many gifts of up to £250 per person each tax year as you wish, provided no other exemption has been used for the same individual. This is known as the small gift allowance.

Special rules apply to wedding and civil partnership gifts. Parents can give up to £5,000 to a child tax-free, grandparents and great-grandparents can give up to £2,500, and anyone else can give up to £1,000. In many cases these exemptions can be combined with the annual exemption.

Another valuable relief covers gifts made out of surplus income. There is no fixed monetary limit, but the gifts must form part of normal expenditure, be made out of income rather than capital, and leave the donor with enough income to maintain their usual standard of living. This exemption can be very useful for individuals with excess pension or investment income who wish to help children or grandchildren on a regular basis. Keeping clear records is important, as HMRC may ask for evidence that the conditions have been met.

Gifts between spouses or civil partners are generally exempt from IHT, provided both parties are permanently domiciled in the UK. Gifts to charities are also normally exempt.

The settlements legislation is designed to ensure that where a settlor retains an interest in settled property, the income arising is treated as the settlor’s income for all tax purposes. A settlor will be treated as having retained an interest where the settlor, or their spouse or civil partner, can benefit from either the income or the underlying property.

In general terms, the settlements legislation may apply where an individual enters into an arrangement which diverts income to another person, resulting in a tax advantage. Such arrangements typically involve an element of “bounty” and are not fully commercial or made at arm’s length.

The legislation is particularly relevant where:

However, there are a number of everyday scenarios where the settlements legislation will not apply. Following extensive case law in this area, HMRC guidance and judicial decisions indicate that where there is no element of bounty, or where there is an outright gift between spouses or civil partners that is not wholly or substantially a right to income, the legislation will not generally be applied.

As a general rule, someone who inherits property, money or shares is not liable to pay tax on the inheritance itself. This is because any Inheritance Tax (IHT) due is normally paid out of the deceased’s estate before assets are distributed to beneficiaries. However, the recipient may be liable to Income Tax on any income generated after the inheritance (for example, dividends from shares) and to Capital Gains Tax on any increase in value of the assets from the date of inheritance.

An important exception applies to gifts made during a person’s lifetime. These are known as Potentially Exempt Transfers (PETs). Such gifts become exempt from IHT if the donor survives for more than seven years after making the gift. If the donor dies within three years, the gift is treated as part of the estate on death for IHT purposes.

Taper relief may apply where death occurs between three and seven years after the gift, reducing the amount of IHT payable. In some cases, individuals take out insurance policies, such as seven-year term assurance, to cover any potential IHT liability during this period.

The position is more complex where the donor retains some benefit from the gifted asset. For example, gifting a house but continuing to live in it rent-free is treated as a ‘gift with reservation of benefit’. In such cases, the asset may still be subject to IHT, even if the donor survives for more than seven years. Additionally, IHT may arise if inherited assets are placed into a trust and the trust is unable to meet the tax liability.

The government recently announced significant changes to the planned reforms to Agricultural Property Relief (APR) and Business Property Relief (BPR). The threshold for 100% relief will be increased from £1 million to £2.5 million when the changes take effect from 6 April 2026. The change will be introduced via an amendment to the Finance Bill 2025 with relief reduced to 50% on qualifying assets above the new level.

Spouses or civil partners will be able to pass on up to £5 million of qualifying agricultural and business assets between them free of inheritance tax, in addition to the existing nil rate bands. The transferable allowance will also apply to surviving spouses or civil partners who were widowed before the new policy was announced.

These changes adjust the reforms first announced at Autumn Budget 2024, which had attracted strong criticism from the farming community and rural businesses over the potential impact on small farms and family-owned enterprises. By raising the threshold, the government aims to significantly reduce the number of estates affected by higher inheritance tax charges, ensuring that the reforms are focused primarily on the largest estates.

The government estimates that around 85% of estates claiming APR in 2026–27, including those also claiming BPR, will pay no additional inheritance tax as a result of these changes.

Shares designated as “not listed”, such as those traded on AIM, will attract BPR at a flat rate of 50% (reduced from 100%) from April 2026. This measure was unaffected by the latest announcement.

Agricultural and business property relief changes that were first announced at Autumn Budget 2024 will come into effect from 6 April 2026. These measures will introduce significant reforms to Business Property Relief (BPR) and Agricultural Property Relief (APR), which provide Inheritance Tax (IHT) relief on qualifying business and agricultural assets. These measures have faced significant criticism for their potential impact on small farms and rural communities.

From April 2026, a new £1 million allowance will apply to the combined value of property in an estate qualifying for 100% BPR or 100% APR. This means that the existing 100% rate of IHT relief will only apply to the combined value of property in an estate qualifying for 100% BPR or 100% APR. The rate of IHT relief will be reduced to 50% for the value of any qualifying assets over £1 million. Accordingly, any assets receiving 50% relief will be effectively taxed at 20% IHT (the full rate being 40%).

The government has also confirmed they will reduce the rate of BPR available from 100% to 50% in all circumstances for shares designated as 'not listed' on the markets of recognised stock exchanges, such as AIM. The existing rate of relief will continue at 50% where it is currently this rate and will also not be affected by the new allowance.

The option to pay IHT by equal annual instalments over 10 years interest-free will be extended to all qualifying property which is eligible for APR or BPR.

Certain buildings, land, works of art, and other objects of national significance may be exempt from Inheritance Tax and Capital Gains Tax (CGT) when they are transferred to a new owner. This exemption applies under a special tax relief for national heritage assets that are either gifted or bequeathed.

To qualify for this relief, the asset must meet at least one of the following criteria:

Upon transfer of ownership, the new owner is required to enter into a formal agreement, known as ‘the undertakings. This agreement ensures that the asset will be cared for, made available for public viewing, and retained in the UK. Failure to meet these conditions, or selling the asset, results in the revocation of the tax exemption under the Conditional Exemption Tax Incentive scheme. As a consequence, the asset would then be subject to tax in accordance with the standard rules.

HMRC is guided by the government’s heritage advisory agencies in deciding which assets qualify for exemption.

Trustees must manage assets, follow tax rules, and register with HMRC where required.

A trust is a legal arrangement in which a trustee, either an individual or a company, is entrusted with managing assets such as land, money, or shares on behalf of others. These assets, placed into the trust by a settlor, are managed for the benefit of one or more beneficiaries.

Trustees are responsible for deciding how the trust's assets are to be managed, distributed, or retained for future use. They are also accountable for reporting and paying any tax due on behalf of the trust. If the trust pays or owes tax, it must be registered with HMRC.

Income received by a trust is subject to varying rates of Income Tax, depending on the type of trust.

Discretionary (or accumulation) trusts: Trustees pay tax on the trust's income. The first £500 is taxed at the standard rate. Income above this threshold is taxed at:

Interest in possession trusts: Trustees are similarly responsible for paying tax on income. The rates are:

There are additional trust structures, for example, bare trusts and settlor-interested trusts, which are subject to different rules and tax treatments. As a result, it is essential to consider both Income Tax and Capital Gains Tax (CGT) implications from the outset when establishing or managing any type of trust.

With the Residence Nil Rate Band (RNRB), families can pass on up to £1 million without IHT

The RNRB is an additional £175,000 Inheritance Tax (IHT) allowance that applies when a person’s main residence is passed to a direct descendant, such as a child or grandchild, after their death. The allowance is available to married couples and civil partners, and it can significantly reduce the IHT liability on family homes.

The RNRB is separate from and in addition to the standard IHT nil-rate band of £325,000. When combined with the standard threshold, a married couple or civil partners can potentially pass on up to £1 million tax-free to their direct descendants. This figure is based on two individuals each having a £325,000 nil-rate band and a £175,000 RNRB.

Importantly, any unused portion of the RNRB from the first spouse or civil partner to die can be transferred to the surviving partner, provided a claim is made to HMRC when the second partner dies. This transfer is not automatic and must be claimed. This is usually done by the executor of the estate during administration.

The RNRB is subject to tapering for larger estates. For estates valued over £2 million, the RNRB is reduced by £1 for every £2 over the threshold. As a result, estates significantly exceeding £2 million may lose the RNRB entirely, even if the home is passed to direct descendants.