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Trusts and debts: the new inheritance tax rule from Budget 2026

Published29 October 2026
Reading time3 min read

What changed for trusts?

From 28 October 2026, new rules govern how debts taken on by trustees reduce inheritance tax on a trust.

Inheritance tax is charged on what you own, less what you owe. Debts can usually be taken off, but there are rules to stop people creating debts just to cut the bill.

Until now, those rules did not deal directly with debts taken on by trustees. HMRC found some trust arrangements were using debts to reduce inheritance tax in ways Parliament never intended. Budget 2026 closes that gap.

For example, a mortgage on your home is normally taken off its value when inheritance tax is worked out. That is fair, because the money really is owed. The problem comes when a debt is created inside a trust mainly to lower the tax, using money that came from the family in the first place.

How the new rule works

The change brings trust debts into line with the rules for personal debts.

Proper trust debts still count. Debts properly taken on by trustees for the trust will generally reduce its value for inheritance tax.
No artificial debts. Where a beneficiary is treated as owning the trust, a debt funded with money from that beneficiary’s own estate cannot cut the tax.
No workarounds. Extra rules stop arrangements designed to get round the change.

It applies to deaths and other tax events on or after 28 October 2026. That includes the ten-yearly and exit charges that apply to many trusts, not just a death.

A beneficiary is usually treated as owning a trust when they have the right to its income for life, known as an interest in possession. This is common in life interest trusts set up in a will.

Does this affect my family trust?

For most families, probably not. HMRC expects only a small number of people to be affected.

The change targets arrangements involving loans or debts inside a trust. These common trusts are not the target:

Trusts in a will, such as a trust will that protects your share of the home
Life interest trusts for a surviving partner
Discretionary trusts that give trustees flexibility
Life insurance written in trust

HMRC expects the change to raise no extra tax. It is about closing a loophole, not a new tax.

When to check your trust

A short check makes sense if your trust has borrowed money.

The trustees have taken out a loan, or owe money to someone.
A beneficiary has lent money to the trust.
The trust was set up as part of a tax-saving scheme.
A beneficiary is treated as owning the trust, for example they have the right to its income.

If none of these apply, the change is unlikely to affect you. If one does, trustees should keep clear records of any loan: who lent the money, when, why and on what terms. Good records make it easier to show a debt is genuine.

Keeping trusts simple

Trusts remain one of the most useful tools for protecting family wealth.

This change does not stop trusts being used for good reasons: protecting children, providing for a partner, or looking after someone vulnerable. It stops artificial debts reducing tax. Our guide to inheritance tax explains the wider rules.

If you are thinking about setting up a trust, the right type depends on what you want it to do. A trust in your will only takes effect after you die, so it can be changed whenever you update your will.

How PJH Estate Planning can help

PJH Estate Planning can review your will, LPAs and tax plans against the latest rules. Start with our free Estate Health Check: 10 quick questions that show any gaps in your plans. You can visit our offices, or we can visit you at home.

Sources

General information as at October 2026. Not legal, financial or tax advice.