Trusts are a legal concept that many people have heard of, but not everyone fully understands.
They’re often associated with the wealthy, but the truth is, trusts can be a valuable tool for people from all walks of life. They offer a way to protect your assets, provide for your loved ones, and ensure your wealth is managed according to your wishes.
Here, we’ll dive deep into the world of trusts. We’ll explain what they are, how they work, and why they might be a smart choice for you.
Let’s go!
First, What is a Trust?
At its core, a trust is a legal arrangement where one person (the settlor) gives their assets (such as property, cash, or investments) to another person (the trustee) to manage for the benefit of a third party (the beneficiary).
The key point is that once you put assets into a trust, you no longer own them. They belong to the trust.
However, you can still control how those assets are used and who benefits from them. This is because the trust deed (the legal document that creates the trust) sets out the rules for how the trust should be managed.
Why Set Up a Trust?
Trusts are a well-established part of UK law and are used for a wide range of personal, financial, and tax planning purposes.
At their core, trusts allow one or more individuals (the trustees) to manage assets on behalf of others (the beneficiaries), according to the terms set out by the person who created the trust (the settlor).
Trusts are often associated with complex tax planning, but they’re just as frequently used in everyday situations – from providing for children to supporting vulnerable family members.
Here’s a comprehensive list of common reasons why someone might set up a trust:
Protecting Assets for Children or Vulnerable People
Trusts are a well-established way to hold assets on behalf of children or individuals who are not yet capable of managing their own finances.
If a child inherits outright, they automatically gain full control at age 18 in England and Wales – or 16 in Scotland. A trust allows you to delay access until a more appropriate age, or distribute funds gradually over time.
In the case of vulnerable or disabled individuals, trusts provide essential safeguards. A Disabled Person’s Trust – which qualifies for special tax treatment under HMRC rules – allows trustees to manage the funds in a way that supports the beneficiary’s needs without affecting their entitlement to means-tested benefits.
This ensures the individual receives support while keeping the money protected from outside influence or financial mismanagement.
Providing for Loved Ones While Keeping Control
Trusts give you the flexibility to support family members without handing over immediate or unrestricted access to wealth. You can set specific instructions for how the money is to be used – whether that means releasing income monthly, providing lump sums at key life stages, or permitting access only for defined purposes like education, housing, or medical care.
This structure is especially valuable where beneficiaries are young, financially inexperienced, or facing personal challenges – such as addiction, legal disputes, or unstable relationships. Trustees can use their judgment to apply the funds responsibly and in the best interests of the beneficiaries.
Managing Inheritance Tax
Inheritance Tax (IHT) is charged at 40% on the value of an estate above the nil-rate band – currently £325,000 per person, or up to £500,000 if the residence nil-rate band applies. Trusts can help reduce or delay IHT liabilities by removing certain assets from your taxable estate.
For example, gifts into a bare trust are treated as potentially exempt transfers – if you survive for seven years after the transfer, the value falls outside your estate entirely.
Other types of trusts, such as discretionary trusts, are treated as chargeable lifetime transfers and may be subject to a 20% entry charge above the nil-rate band, as well as 10-year and exit charges. Despite this, they can still offer significant planning advantages – such as capping future growth or spreading IHT allowances across generations.
Avoiding Probate
Probate is the legal process of administering a deceased person’s estate, and it can take several months – sometimes longer.
During that time, assets are frozen and beneficiaries may be unable to access funds. Assets held in trust, however, do not pass through the deceased’s estate and therefore do not require probate to be accessed.
This can speed up the distribution of funds, provide privacy (as trusts do not go on the public probate register), and reduce stress for family members. In some cases – particularly for business owners or people with overseas assets – avoiding probate delays can be a critical advantage.
Protecting Family Wealth Across Generations
Trusts are frequently used to preserve wealth for future generations. By placing assets into a trust, you can ensure that they remain within the family line – rather than being lost to divorce settlements, bankruptcy proceedings, or irresponsible spending by individual beneficiaries.
Trustees have a legal duty to manage the assets for the benefit of current and future beneficiaries. This enables long-term stewardship of property, investments, or businesses across multiple generations – while still allowing a degree of flexibility to respond to changing needs or circumstances.
Supporting a Spouse While Preserving Capital for Others
In blended families, people often want to provide for a surviving spouse without disinheriting children from a previous relationship.
A trust can strike that balance. One common structure is an interest in possession trust, which allows the spouse to receive income (or live in a property) for the rest of their life, after which the underlying capital passes to children or other named beneficiaries.
This approach ensures ongoing financial support while preserving the core estate for your intended heirs. It also reduces the risk of disputes and provides clarity about how your estate should be divided.
Planning for Business Succession
Passing on a family business is often a complex process, both emotionally and financially. Trusts can help transfer shares or interests to the next generation in a structured way – allowing existing owners to retain control during their lifetime while gradually introducing successors.
If the business qualifies for Business Relief – typically up to 100% of the value for certain trading businesses – transferring shares into a trust can potentially be done without triggering Inheritance Tax.
This allows you to preserve the business as a family asset and avoid forced sales simply to cover tax liabilities.
Charitable Giving
Charitable trusts are a powerful tool for people who want to support causes they care about in a long-term and tax-efficient way.
A trust can be established during your lifetime or through your will, and it can support one or more registered charities or purposes that qualify under UK charity law.
Gifts into a charitable trust are free from Inheritance Tax, and the trust itself is exempt from Income Tax and Capital Gains Tax on its qualifying activities. It’s an ideal option for legacy planning, especially for those who want more control over how their charitable contributions are used.
Protecting Assets in Case of Divorce or Bankruptcy
While no structure can guarantee protection from legal claims, a discretionary trust can provide a degree of separation between beneficiaries and the underlying assets. In divorce or bankruptcy proceedings, courts will look closely at whether the trust is genuine and independent – but if it has been set up correctly, it may prevent direct access to the funds.
This makes trusts a valuable tool for those who want to ring-fence wealth from future personal risks faced by children or other beneficiaries – particularly if there are concerns about unstable relationships or financial trouble.
Providing for a Blended Family
Where families include children from previous relationships, trusts offer a fair and structured way to balance competing interests. You might want to ensure your second spouse is cared for if you die first, but also want to protect the inheritance rights of your children from an earlier relationship.
By using a trust, you can provide income or housing to your spouse while preserving the capital for your children. This avoids the risk of disinheriting either party and provides certainty about how your estate should be handled, even if family relationships are complicated or change over time.
The Many Different Types of Trusts
There are many different types of trusts, each designed for a specific purpose. Choosing the right type of trust for any given use is complex – you’ll need to engage a tax advisor or accountant to help.
Here are some of the most common types of trusts you’ll find:
Bare Trust
Also known as a simple trust. The beneficiary has an immediate and absolute right to both the income and the capital. Often used to hold assets for children until they reach adulthood – usually age 18 in England and Wales, or 16 in Scotland.
Interest in Possession Trust
The beneficiary has a legal right to the income generated by the trust – for example, rental income – but not the underlying capital. Common in wills, where a spouse receives income for life and the capital later passes to children.
Discretionary Trust
Trustees have full discretion over how the income and capital are distributed – they decide when, how much, and to whom. Useful when you want flexibility or need to protect assets for beneficiaries with uncertain needs or unstable circumstances.
Accumulation Trust
A form of discretionary trust where income can either be paid out or accumulated and added to the capital. Often used when beneficiaries are not yet entitled to income or capital – for example, during childhood.
Mixed Trust
A trust combining different types – such as one part being discretionary and another being an interest in possession. Useful for complex family arrangements or inheritance structures.
Settlor-Interested Trust
A trust in which the settlor – or their spouse or civil partner – can benefit. These trusts are taxed differently: any income generated is taxed on the settlor, not the trust or the beneficiaries.
Disabled Person’s Trust
A trust set up specifically to benefit someone who meets HMRC’s definition of being disabled – such as someone receiving Personal Independence Payment (PIP) or who is incapable of managing their affairs.
These trusts benefit from special tax treatment – including exemption from the 10-year and exit charges that apply to most discretionary trusts, and more favourable income and capital gains tax rules.
Non-Resident Trust
A trust where all trustees are not UK tax residents. These trusts are subject to complex tax rules and are often used for offshore planning – but anti-avoidance legislation can still apply if the settlor or beneficiaries are UK resident.
Charitable Trust
A trust established exclusively for charitable purposes – such as education, poverty relief, or religion. These trusts benefit from full exemption from income tax, capital gains tax, and inheritance tax, provided they meet strict criteria set by charity law.
As we can see, the type of trust that’s right for you will depend on your specific circumstances and objectives. It really is crucial to get professional advice to ensure you choose the most appropriate trust structure.
Setting Up a Trust – The Need-to-Know
If you’ve decided that a trust is right for you, what’s the process of setting one up? While the process varies from trust to trust and application to application, here’s a step-by-step guide:
- Decide on your objectives: What do you want the trust to achieve? Who do you want to benefit and how? What assets do you want to put into the trust? Answering these questions will help you determine the right type of trust for your needs.
- Choose your trustees: Your trustees will be responsible for managing the trust, so it’s important to choose wisely. You can have one trustee or multiple trustees. They can be individuals (such as friends or family members) or a professional trustee service.
- Draft the trust deed: This is where you’ll need the help of a solicitor. The trust deed is the legal document that creates the trust, so it’s important that it’s drafted correctly. It will include details of the settlor, trustees, beneficiaries, the assets in the trust, and the terms of the trust.
- Transfer the assets into the trust: Once the trust deed is signed, the assets need to be legally transferred into the ownership of the trust. This process will vary depending on the type of asset. Property, for example, will need to be transferred with the Land Registry.
- Trust registration: Most trusts need to be registered with HMRC. This is done through the Trust Registration Service (TRS). There are deadlines for registration, and failure to register can result in penalties.
The Pros and Cons of Trusts
While trusts can be a powerful tool in estate planning and asset protection, they’re not without their drawbacks. Here’s a look at some of the main advantages and disadvantages:
Pros:
- Can protect your assets from legal claims, creditors, and in some cases, inheritance tax
- Allow you to control how and when your beneficiaries receive your assets
- Can provide for loved ones who are unable to manage their own affairs
- Offer privacy and confidentiality
- Can avoid the probate process, saving time and money
Cons:
- Can be complex and costly to set up and maintain
- You lose ownership of the assets in the trust
- There are ongoing administrative duties for trustees
- Trusts are subject to their own set of tax rules, which can be complicated
- Trusts are not suitable for everyone – they are typically most beneficial for those with significant assets or complex family situations
Ultimately, whether a trust is right for you will depend on your individual circumstances and objectives.
Trusts and Taxes: A Complex Relationship
One of the most complex aspects of trusts is their tax treatment. Trusts are somewhat subject to their own set of tax rules – or at least tax laws mix with them in some nuanced ways – which can be convoluted and are often changing.
Here’s a brief overview:
- Income Tax: Trusts are liable for income tax on their income. The rate of tax depends on the type of trust and the nature of the income.
- Capital Gains Tax (CGT): If assets in a trust are sold or disposed of and a profit is made, CGT may be payable. Again, the rate depends on the type of trust and the nature of the assets.
- Inheritance Tax (IHT): Assets transferred into a trust may be subject to IHT, depending on the value of the assets and the type of trust. Some trusts (like bare trusts) are treated as ‘transparent’ for IHT purposes, meaning the assets are treated as still belonging to the settlor. Others (like discretionary trusts) are subject to their own IHT regime.
The taxation of trusts is a complex area, and the rules are subject to change. It’s essential to get up-to-date advice from a tax professional before setting up a trust.
Get Expert Advice from Double Point
At Double Point, our team of chartered accountants understands the many nuances of trusts.
Whether you’re considering setting up a trust to protect your assets, provide for your family, or manage your tax liabilities, we can guide you through the process from start to finish.
Our service includes:
- Advising on the suitability of a trust for your circumstances
- Recommending the most appropriate type of trust
- Assisting with the transfer of assets into the trust
- Advising on the tax implications of your trust
- Providing ongoing support and advice
If you’re considering a trust, get in touch with us today. Our friendly team is here to help steer you through the world of trusts with transparency and confidence.
