With inheritance tax planning becoming a growing concern for many clients, Mark Lambert, Head of Onshore Bond Distribution at Chesnara Life (UK) Ltd, discusses how trusts and onshore investment bonds can work together to support effective estate planning.
Understanding the benefits for clients of holding onshore investment bonds in trust as well as the different types of trusts is increasingly important for advisers and paraplanners.
The growing use of trusts is underlined by data from the Trust Registration Service (TRS) showing that nearly a seventh of registered and open trusts and estates were registered in the past year.1
The most up to date TRS figures showing 835,000 trusts and estates registered highlight how important trusts currently are in financial planning as advisers and clients increasingly recognise the importance of trusts in helping to mitigate potential inheritance tax liabilities.
The impending inclusion of unused defined contribution pensions in estates from April 2027 is among the reasons why the use of trusts is increasing.
Recent Chesnara Life research2 underlines how the use of trusts could grow in the future – more than two out of three (68%) advisers questioned said they will use onshore investment bonds with trusts more in IHT and estate planning in response to the new pension rules.
Onshore bonds tax position in trusts
Onshore investment bonds may provide tax-deferred growth, administrative efficiencies, and trust-based options for wealth transfer, depending on individual circumstances.
Dividends generated from underlying investments are received by the bond provider on the investor’s behalf completely tax free and without limit which is not the case if they are received directly by the trustees.
All other income is taxed broadly speaking at the rate of 20%, compared to 45% if received by the trustees. This is the situation in the tax year following the settlor’s death as any bond tax liability will fall on settlor during their lifetime and in the tax year of death – although this can be reclaimed from the trustees.
There is no tax liability on the trustees while the bond is just left to run. The bond delivers tax deferment and there are options to manage the taxation outcome when funds are needed for the beneficiaries.
The basics on trusts
Absolute or Bare trusts are generally used for straightforward gifts where the beneficiary cannot be changed and are used for passing assets directly to children or grandchildren.
Discretionary trusts may provide flexibility for trustees to change beneficiaries and the amounts allocated, which can make them relevant for some multi-generational wealth planning needs.
Discounted gift trusts and loan trusts allow the settlor to receive fixed capital withdrawals while immediately reducing the estate value for IHT. Loan trusts allow access to the initial capital until the loan is repaid.
Trusts in more detail
Generally, clients for whom gift trusts are suitable will have an estate worth more than £325,000 and be able to give assets away. That will very much apply when clients’ unused DC pensions are included in estates. They are likely to have surplus capital which they do not need to access in the future.
Using a gift trust with an onshore bond may provide access to collective investments, flexibility, and a transparent charging structure. Bonds providers will generally calculate the tax liability for each bond.
Gift trusts can be set up as an absolute or discretionary trust. When deciding on which type of trust, your client will need to consider how much flexibility they wish to have in changing the beneficiaries at a later date, how much control they wish the trustees to have over the trust fund and how their chosen beneficiaries may benefit from it.
An Absolute Trust may be appropriate where the client knows exactly who should benefit from the fund and can stipulate this when the trust is set up. The gift will be treated as a potentially exempt transfer for IHT purposes and there will be no IHT liability if the client survives seven years.
With a Discretionary Trust the client retains flexibility on beneficiaries with trustees making the decision on who benefits, in what proportion and when. The trust deed outlines the classes of beneficiaries and clients can add names.
Discounted gift trusts enable clients to gift a sum of money to beneficiaries through an onshore bond and continue to take annual withdrawals up to 5% a year. Generally, they are suitable for clients who have money to invest but are unable to give up complete access to their capital.
Clients potentially achieve an immediate reduction in the value of their estates and further reduce the value of their estate if they survive more than seven years. They also receive fixed regular payments during their lifetime and can ensure any money left is distributed to beneficiaries.
Loan trusts may be suitable for clients who are not able to give away an asset – instead they make an interest-free loan to the trustees of the loan trust. The loan is repayable on demand. The trustees direct the settlor to invest the loan monies into the bond and have the bond issued into the names of the trustees. Loan trusts can be either absolute or discretionary.
In summary, trusts can offer a broad range of financial and estate planning solutions and, in combination with an onshore investment bond, may provide options for clients where suitable for their individual circumstances.
To find out more about Chesnara Life, head here.
Sources
- UK Government statistics on trusts in the UK – published 18th December 2025.
- Chesnara Life commissioned independent research company PureProfile to interview 200 UK financial advisers during April 2026.
About Chesnara Life (UK) Ltd
Chesnara Life (UK) Ltd, formerly HSBC Life (UK) Limited, is a UK subsidiary of Chesnara plc. Chesnara Life offers its open architecture Onshore Investment Bond as a stand-alone offering or through a range of third-party investment platform partners. The Chesnara Life Business Development Team supports all versions of our Bond. The Chesnara Life Onshore Investment Bond provides individual investors with access to over 4,800 funds (Investment Trusts, Open Ended Investment Companies, Unit Trusts, and Exchange Traded Funds) from more than 200 Fund Managers. chesnaralife.co.uk
Chesnara Life (UK) Ltd is authorised by the Prudential Regulation Authority (“PRA”) and regulated by the Financial Conduct Authority (“FCA) and the Prudential Regulation Authority (“PRA”). Our Financial Services Register number is 133435 and our registered office is at: 2nd floor, 33-34 Winckley Square, Preston, Lancashire, PR1 3JJ, United Kingdom. Registered in England number 88695.
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