The Complete Guide to Trusts in the UK
Trusts are neither a scam nor a magic wand. They are a legal structure for holding assets separately from any one individual's estate — with their own tax rules, their own paperwork, and their own genuine uses.
A trust is created when one person (the settlor) gives assets to trustees to hold for beneficiaries. The trustees are the legal owners; the beneficiaries have the economic benefit. That separation is the entire point.
Whether a trust is right for you depends on what you're trying to solve. This guide sets out the main types, how they're taxed, and where they earn their keep.
The main types of trust
Bare trusts: the beneficiary is absolutely entitled to the assets. Common for holding assets for minor children.
Interest in possession trusts: one beneficiary has the right to income; another (often on death) receives the capital. Common in second-marriage planning.
Discretionary trusts: trustees decide who gets what, when. The most flexible and the most commonly used for family planning.
Property trusts (also called Life Interest Trusts on a property): typically used on first death to ring-fence half the family home from care fees and remarriage.
How trusts are taxed
Discretionary trusts carry a 10-year periodic charge of up to 6% on the value above the nil-rate band, and an exit charge when capital leaves the trust. Assets over the nil-rate band settled into a trust also carry an entry charge of 20%.
Bare trusts and interest-in-possession trusts are treated more like the beneficiary's own property for tax purposes.
Properly used, trusts save many multiples of what they cost in tax and fees. Poorly used, they create tax without benefit.
When trusts actually earn their keep
Protecting the family home on first death from being lost to care fees on second death.
Holding life cover so the pay-out never enters the estate and never attracts IHT.
Passing assets to children of a first marriage while giving a second spouse a home for life.
Holding assets for children until they reach an appropriate age.
Cross-generational family wealth planning where the alternative is 40% IHT at every generation.
Common mistakes
- ·Setting up a discretionary trust with assets over the nil-rate band and being surprised by the 20% entry charge.
- ·Using an off-the-shelf 'family protection trust' sold at a seminar for a fee, with no clear purpose behind it.
- ·Naming trustees who don't understand what they're being asked to do.
- ·Never registering the trust with HMRC's Trust Registration Service — a legal requirement for almost all trusts since 2022.
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