Trust liabilities and inheritance tax: is a review needed?

The changes took effect from Budget-day, 28 October 2026, and could affect existing trust arrangements involving liabilities, including where trustees owe money to a beneficiary, particularly a life tenant. The key message is that a liability that has previously been treated as reducing the value of trust property for IHT purposes may no longer be deductible in the same way.

What has changed?

There are two aspects to these changes. First, to put rules relating to the general deductibility of liabilities for trusts onto a statutory footing; and second, to ensure existing anti-avoidance rules in this area are operating as intended.

General deductibility of liabilities

Prior to the Budget, legislation did not specifically provide for trustees’ liabilities to reduce the value of trust assets when valuing these for IHT purposes. Instead, trustee liabilities were effectively reflected in the value of trust assets through the trustees’ equitable right to meet these liabilities from the trust fund through their right of indemnity (known as the trustees’ lien).

For example, a beneficiary may have lent money to trustees, perhaps enabling the trustees to purchase a property. The trust owns the property but has a corresponding liability to the beneficiary. When valuing the property for IHT purposes, the trustees would deduct the value of the loan as they have a right to discharge the loan from the trust fund.

The government is now putting the treatment of these liabilities onto a specific statutory footing subject to the existing wider rules restricting the deduction of debts for IHT purposes (for example, where the liabilities are attributable to financing excluded or relievable property for IHT purposes). The Finance Bill 2026-2027 (published on 4 November 2026) introduces a new statutory rule under which a liability properly incurred by trustees when acting on behalf of the settlement is generally taken into account, to the extent that it remains outstanding at the relevant time. This remains subject to the wider statutory restrictions on the deduction of liabilities. The trustees’ corresponding right of indemnity or lien is not itself taken into account.

Anti-avoidance measure

The Finance Bill 2026-2027 includes a new restriction on the deductibility of liabilities in a trust context where the trust is a qualifying interest in possession (“QIIP“) trust under which a beneficiary (the “life tenant“) is treated as beneficially entitled to the trust property for IHT purposes. Broadly, the new restriction will apply where the consideration for the liability derives from the life tenant or from property to which the life tenant was beneficially entitled. The liability may then be abated, in whole or in part, when valuing the trust fund, although the legislation contains exceptions and its application will depend on the precise arrangements.

Although not explicitly referenced, this particular measure relates to the recent Court of Appeal decision in Elborne v HMRC, which concerned a historic type of IHT planning known as a “home loan” arrangement. The loan in this case, which originated from the life tenant’s own property, was found to be deductible and consequently produced a favourable IHT outcome for the trustees and life tenant, despite being regarded by HM Revenue & Customs (“HMRC“) as a contrived arrangement inconsistent with the intended operation of the legislation.

Which arrangements could be affected?

Existing trust arrangements involving loans or other liabilities should be checked in light of these new rules, especially where the trustees’ IHT analysis depends on those liabilities reducing the value of the trust fund. Such a review will be particularly important where a trust has an upcoming IHT event, such as a ten-year charge. The key point will be whether the liability is properly incurred under the proposed new test. Subject to the point below regarding QIIP trusts, many ordinary trustee liabilities may continue to qualify, but the position should be checked by reference to the facts and the wider statutory restrictions.

In the context of QIIP trusts, any loan by the life tenant to the trustees should be reviewed under the new anti-avoidance aspects of these rules. Although we suspect this measure was introduced to counter Elborne-style “home loan” arrangements in QIIP trusts, trustees should not assume that the new rules stop this type of planning only. Other loans from life tenants to trustees could potentially be caught.

Furthermore, for QIIP trusts, care is needed before an affected liability is repaid during the life tenant’s lifetime. Where trustees use trust property to discharge a liability that would have been abated on the life tenant’s death, the payment may itself be treated as the termination of part of the life tenant’s interest and give rise to a potentially exempt transfer by the life tenant. Advice should therefore be taken before repayment, rather than only when the next IHT chargeable event arises.

It is important to note that the new rules apply to transfers of value made, and occasions on which IHT is chargeable, on or after 28 October 2026. They can therefore affect existing trusts and liabilities entered into before the Budget. As such, existing arrangements should not be assumed to retain their previous IHT treatment simply because they pre-date the Budget.

What should trustees and beneficiaries do now?

For affected trusts, the first step should be to identify any outstanding loans or liabilities, establish how they were originally funded and review whether they will remain deductible under the new legislation. This should ideally be done in good time before the next IHT chargeable event.

The new rules do not mean that all trust liabilities will cease to be deductible. Properly incurred and outstanding trustee liabilities can still be taken into account, subject to the wider statutory restrictions.

The changes provide a timely reminder that long-standing trust arrangements should be reviewed periodically as tax legislation evolves.

Wedlake Bell can review existing trust and loan arrangements, assess whether liabilities remain deductible for IHT purposes and advise trustees and beneficiaries on any implications for their wider estate and succession planning.

This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.

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