Wills and Trusts in the UK - How better to bequeath an estate in 2025?

In the UK, the transfer of assets can be divided into two ways: Making a will or making a trust. The two forms differ significantly, both in terms of how they work and their functionality. In doing so, it is important to remember that the two are not mutually exclusive - a will is almost always made, whereas a trust can be an addition that is very useful in certain, specific situations. Whether you should consider a trust depends largely on your financial and family situation - by identifying your needs and expectations for succession planning, it will be easier for you to make the right decision. In this article, we will advise you on what you should consider when planning the fate of your estate.

What is the difference between a will and a trust?

Before going into specific advice, let us first remind you of the difference between a Will and a Trust. While the latter term, trust, is roughly understandable for those coming from the UK or having lived here for many years, it is not uncommon for foreginers coming to the UK to have some problems with it. This common law specific creation is practically not found anywhere else. For this reason, we will try to briefly describe what it is all about.

A trust is a legal form in which, under a contract known as a trust deed, the maker (Setlor) transfers his or her assets to trustees of his or her choice, who are usually tasked with properly managing the assets taken into their care and, in due course, passing them on to the beneficiaries. In different cases, the principles of a trust may differ in detail from the above example, as there are several forms of trust -** this issue, as well as many others related to trusts, is described in a comprehensive article on the subject entitled ‘Trusts - Everything you need to know’.**

Making a will, on the other hand, is a common form of transferring property. A will is a legally binding document which, drawn up by the owner of the property (the testator), specifies what will happen to the property after his or her death. Here, there is also the concept of a beneficiary (heir) - this is the person (or persons) who is to inherit the estate by virtue of the declaration of will. In addition to this, the will names executors, i.e. persons responsible for the disposition of the estate after the testator’s death.

Inheritance Tax

One of the most important issues at stake when choosing a form of estate planning is inheritance tax, or Inheritance Tax. It amounts to as much as 40% of the value of the estate, which is quite a lot, and can be particularly problematic when the estate is mostly made up of assets, such as just property - HMRC expects payment in cash. Note, however, that the 40% is only calculated on the portion of the amount above the tax-free amount, i.e. in the case of Inheritance Tax £325,000 (or £500,000 if it applies to property passed on to children or grandchildren).

To illustrate the calculation of Inheritance Tax, we will use an example. Suppose Peter inherits a house worth £450,000 and £50,000 in cash from his father-in-law. The total value of the estate is £500,000, so subtracting the tax-free amount leaves £175,000 - tax must be deducted from this value.** 40% * £175,000 = £70,000**, so not a small amount. However, there are reliefs or ways to bypass this tax using a trust - these will be described later in this article.

Advantages and disadvantages of both forms of succession planning

In addition to Inheritance Tax, there are a number of issues to be aware of when rewriting assets. Below, we have put together a list of the pros and cons of both ways of managing wealth.

Wills - Advantages and disadvantages

Among the advantages of choosing a will we can include:

• almost complete control over the estate - a will can describe exactly who gets what, who is to be left out and even who is to look after the testator’s offspring (if they are minors). UK law provides some restrictions on disinheriting next of kin, but in the UK there is no inheritance, for example;

• simplicity - making and understanding the rules for enforcing a will is much easier than using a trust properly and safely;

• the ability to change a statement of intent at any time - a will has the advantage that it can be changed at any time, allowing it to adapt to changes in the testator’s life on an ongoing basis (e.g. the marriage of one descendant);

• avoidance of disputes within the family - because of how precisely an inheritance can be administered, there will be no doubt left as to how it should be disposed of.

In turn, the defects in the will are:

• the need to go through the probate - if the estate is only secured by a will, the beneficiaries will have to wait for the succession process to be completed to receive their claim. This usually takes several months;

• Inheritance Tax - a will does not protect against IHT in any way, so if beneficiaries do not qualify for any relief, they will have to pay its full amount;

• lack of asset protection - once your estate has passed to your beneficiaries, anything can happen to it and you have no control over it (for example, a beneficiary could squander or lose a large part of it through divorce);

• **the risk of an outdated document **- a poorly drafted will may not be well suited to future changes in the composition of your estate or family situation. This is because it is important to remember that a few years after writing your will, you may change the

Trusts - Advantages and disadvantages

The main advantages of using a trust are:

• ability to protect assets - a trust allows you to influence the management of the estate’s fate even after the testator’s death - this is what a trustee is appointed for;

• no succession process - assets transferred to a trust do not have to go through the succession process, making it possible for beneficiaries to benefit soon after the setlor’s death. Trusts are used inlife insurance for exactly the same reason - the policy then goes straight to the beneficiaries;

• flexibility - the drafting of a trust gives more options for succession planning than a will;

• no Inheritance Tax - assets transferred into a trust are not usually subject to inheritance tax.

The Trust does, however, have its drawbacks:

• Legal complexity - in order to draw up a trust correctly, it is strongly recommended to take specialist advice. He or she will help to write the trust deed correctly, advise on the management of the assets and ensure the legal correctness of the whole venture. This unfortunately generates additional costs;

• taxation - although the transfer of assets to the trust eliminates the need to pay Inheritance Tax, there are several other taxes that the trustee or beneficiary will have to pay in the future (10 year charge, exit charge);

A property whose value does not exceed £325,000

Let’s go through some practical examples to show when it makes sense to choose a will, and when a trust, as a form of estate planning. First, let’s consider a situation where the value of the estate is £300,000, with the house worth £250,000 and the remaining £50,000 being a car, some savings and a collection of rare books.

As you may have read above, an inheritance worth £300,000 is included in the Inheritance Tax free amount. This means that if you wish to simply pass on your property and other assets to your descendants, there will be no tax benefit from creating a trust and you only need to make a will accurately and legally. In such a situation, using the services ofCitywide Wills will still make sense - as you will be safeguarding against the risk of errors arising which can be stressful and costly for your loved ones.

However, if you have specific ideas about how to plan the transfer of your estate and would, for example, like the funds to be paid out when a condition is met or in an unusual way, it is further worthwhile to go for a trust. When your aim is solely to pass on your home to your children and avoid tax, a will will suffice.

Transfer of a large estate

The situation will be quite different when it is necessary to bequeath a very expensive property, worth, for example, £800,000 to a child of the testator. In such situations, a number of special provisions are relevant - after all, family members have a higher tax-free amount and, at the same time, the testator’s children can use the unused amount accruing to the previously deceased spouse.

The most important aspect in this situation is the so-called Residence Nil Rate Band (RNRB), an increase in the tax-free amount to £500,000. The RNRB is applied if two conditions are met at the same time:

• the property to be bequeathed was the deceased’s primary residence - it cannot therefore be, for example, an office;

• the beneficiary of the will is the testator’s direct descendant - i.e. a child or grandchild, but no longer, for example, the grandchild’s spouse.

Interestingly, the RNRB amount is transferable - if the testator’s spouse dies without using it, it is transferred. As a result, it is often possible to inherit a house worth £900,000 and not pay even a pound of tax. Similarly, however, complications can arise resulting in a very large liability to HMRC. It is definitely worth planning well for the inheritance of large masses of property and employing a specialist to do so.

When is it better to use a trust?

Trusts are used in a really wide range of situations - from the simplest, where the owner of an estate wants to avoid Inheritance Tax, to the more complicated, where he or she would like to dispose of an inheritance in such a way that his or her wife receives the financial benefits of the earning estate (for example, property purchased for rental or investment assets), but it is the children who can take it over when they reach the age of majority (Interest in possession trust).

To illustrate the mechanism of the financial benefit of using a trust, we will use a simple example. Its protagonist will be Michael, who owns a property worth £400,000 and £150,000 in cash. The house and money are to be passed to his son-in-law, who is necessarily not entitled to the Residence Nil Rate Band.** If this were to be done by way of a will, the beneficiary would have to pay as much as £90,000 in tax.**

Instead, Michael sets up a discretionary trust, whereby he allows the trustee to manage this estate, i.e. to look after the flat and collect rent and perhaps even invest the cash. The trustee is also instructed to give the assets to Michael’s son-in-law upon his death.** This way, the beneficiary will receive the full estate without waiting for the end of the inheritance process and paying Inheritance Tax.**

Remember, however, that a discretionary trust has risks - the trustee has a great deal of discretion over the management of the assets, so Mr Michael needs to be confident in the person chosen and to write the trust deed correctly, with the help of someone who is a specialist in the subject.

Summary

Wills and Trusts are two different tools for succession planning. Knowing their advantages and limitations is very useful in choosing the right option for your personal situation. However, the subject is a very convoluted one - both forms are very useful, but operate on completely different principles. There are plenty of hooks and requirements that cannot be overlooked in both writing a will and drafting a trust - mistakes in these actions can cause considerable problems for our loved ones. For this reason, it is highly recommended that you use the services of professionals who know the UK law inside out and have helped hundreds of people properly plan the fate of their estate. Extend Finance particularly recommends Citywide Wills, a trusted inheritance adviser with a huge amount of experience.