Definition
A pilot trust is a discretionary trust created during your lifetime with a nominal sum (typically £10) that sits dormant until substantial assets are added, usually via your will or pension benefits.
This specialist estate planning structure remains legally active but empty, ready to receive significant assets when needed—typically on death or when pension death benefits become payable.
What Does Pilot Trust Mean?
A pilot trust is established as a discretionary trust during a person's lifetime, meaning the trustees have flexibility to decide how and when beneficiaries receive funds rather than distributions being fixed in advance. The settlor creates the trust with a token amount (often literally a £10 note historically pinned to the trust deed), which makes it a valid legal structure under trust law. The trust then remains dormant until it receives substantial property, most commonly from the settlor's estate on death, pension death benefits, or life insurance proceeds. This is why it's called a "pilot" trust—like a pilot light on a boiler, it exists and is ready to activate but isn't doing much until it receives the main fuel. Under trust law principles, the trust must be properly constituted with identifiable beneficiaries, trustees with defined powers, and certainty of intention to create a trust, despite the minimal initial funding.
Before December 2014, a common sophisticated planning strategy involved creating multiple pilot trusts on consecutive days, then adding substantial assets to all of them on the same day (typically on the testator's death through their will). Each trust could benefit from its own nil rate band (currently £325,000) when calculating inheritance tax charges, significantly reducing the 10-year periodic charges and exit charges that apply to discretionary trusts under the relevant property regime. The Finance (No. 2) Act 2015 effectively ended this planning technique by introducing "Same Day Additions" rules in Section 62A of the Inheritance Tax Act 1984, which treat same-day additions to multiple trusts as "related settlements" for IHT purposes. This means the value in all related trusts must be aggregated when calculating tax charges, eliminating the advantage of having separate nil rate bands. The anti-forestalling provisions made these rules effective from 10 December 2014, preventing last-minute implementation of the old strategy. While this represented a significant curtailment of traditional pilot trust planning, it's important to understand that the 2015 changes targeted a specific tax avoidance technique—they didn't render pilot trusts obsolete for all purposes.
The most common current use for pilot trusts is as "spousal bypass trusts" for pension death benefits, which remains fully effective and widely recommended by financial advisors. When a pension scheme pays out a lump sum on death, it can be directed into the pilot trust where the surviving spouse is a beneficiary. The spouse can access the funds as needed through trustee distributions, but crucially, the money doesn't form part of their estate for IHT purposes when they subsequently die—potentially saving hundreds of thousands of pounds in inheritance tax on the second death. This works because the pension benefits were never owned by the surviving spouse personally; they're held in trust for their benefit. Pilot trusts are also valuable for business owners who want sale proceeds protected in trust while maintaining business property relief eligibility, and for directing life insurance proceeds into a flexible trust structure. All pilot trusts created on or after 6 October 2020 must be registered with HMRC's Trust Registration Service, regardless of the nominal value, and trustees have ongoing compliance obligations including keeping accurate records and filing returns when required.
Common Questions
"When would my financial advisor recommend a pilot trust?" Your financial advisor might recommend a pilot trust if you have significant pension funds or life insurance and want your surviving spouse to benefit without those assets forming part of their estate for inheritance tax purposes. This is particularly valuable if your combined estates exceed £1 million, as it can result in substantial tax savings on the second death. Pilot trusts are also useful for business owners who want sale proceeds protected in trust while maintaining business property relief eligibility.
"I've heard pilot trusts don't work anymore for tax planning—is that true?" Partially true. The Finance (No. 2) Act 2015 ended the traditional use of multiple pilot trusts to multiply nil rate band benefits, as additions made on the same day are now treated as related settlements. However, pilot trusts remain highly effective for specific purposes like pension death benefit planning and business asset protection, where the goal is spousal bypass rather than multiple nil rate bands.
"Do I need to do anything with my old pilot trust that was set up before 2015?" Yes—any pilot trust created before the 2015 changes should be reviewed by a specialist solicitor to ensure it still serves a useful purpose and complies with current Trust Registration Service requirements. Trusts created before 6 October 2020 with a value under £100 are currently excluded from registration, but if your trust receives significant assets it will need registering. Your trust may need updating to reflect the changed legislative landscape.
Common Misconceptions
Myth: Pilot trusts are now completely useless because of the 2015 tax changes
Reality: While the Finance (No. 2) Act 2015 ended the traditional multiple-trust IHT planning (where several pilot trusts on different days received same-day additions to multiply nil rate bands), pilot trusts remain valuable for spousal bypass planning with pensions and business assets. In these scenarios, the goal isn't multiple nil rate bands but ensuring assets benefit the spouse without being added to their estate. This planning remains fully effective and widely used by wealth advisors for clients with significant pension funds or business interests requiring flexible estate planning structures.
Myth: I can set up a pilot trust myself by putting £10 aside and writing that I want it to be a trust
Reality: Pilot trusts must be properly drafted by a solicitor experienced in trust law to be legally valid and tax-effective. The trust deed must be precisely worded to comply with trust law principles, properly define the beneficiaries and trustees' powers, address tax issues, and meet HMRC registration requirements. A DIY pilot trust is likely to be invalid, fail to achieve the intended tax benefits, or create unintended tax liabilities potentially costing tens of thousands of pounds. This is specialist work requiring professional legal and tax advice—the "nominal" £10 funding doesn't mean simple drafting.
Related Terms
Understanding Pilot Trust connects to these related concepts:
- Trust: A pilot trust is a specific type of trust structure—understanding what trusts are and how they function under UK law is foundational to grasping how pilot trusts work.
- Discretionary Trust: Pilot trusts are almost always structured as discretionary trusts, giving trustees flexibility in deciding distributions rather than having fixed beneficiary entitlements.
- IHT Planning: Pilot trusts were historically a cornerstone of sophisticated inheritance tax planning and remain valuable for specific IHT-efficient strategies, particularly pension death benefit bypass planning.
- Chargeable Lifetime Transfer: Creating a pilot trust is technically a chargeable lifetime transfer for IHT purposes, though the nominal £10 value means no tax is payable.
- Settlor: The settlor is the person who creates the pilot trust during their lifetime and settles the initial nominal sum into it.
Related Articles
- Discretionary Trusts in Wills Explained: Understanding discretionary trust mechanics is essential to grasping how pilot trusts function, as they use the same underlying legal structure with flexible trustee powers.
- Property Protection Trusts for Homeowners: Many property protection strategies employ pilot trust structures to receive property interests on death while providing flexible access for the surviving spouse.
- Using a Deed of Variation to Change a Will: Pilot trusts can be created or funded post-death using a deed of variation within two years, providing a "second chance" to implement trust planning that wasn't in the original will.
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Legal Disclaimer: This glossary entry provides general information about UK legal terminology and does not constitute legal advice. Pilot trust planning involves complex interactions between trust law, inheritance tax legislation, and pension regulations. The Finance (No. 2) Act 2015 significantly changed how pilot trusts are taxed, making professional advice essential. Always consult both a solicitor specializing in trust law and a tax advisor before creating or funding a pilot trust. For advice specific to your situation, consult a qualified solicitor.