Trusts are often assumed to be only for the very wealthy. That assumption is out of date. They are used every day by ordinary families, to hold money for children, provide for a relative who cannot manage their own affairs, pass on a business, or keep an estate together for the next generation.
A trust is a way of separating who owns an asset from who benefits from it. That separation is what makes trusts useful, and it is also why they are worth taking advice on, because the tax rules around them have changed a good deal in the past two years.
This guide covers what a trust is, why people set one up, the main types you’ll meet, how to create one, and how trusts are taxed under the current rules.
What Is a Trust?
A trust involves three roles. The settlor is the person who puts assets in. The trustee is the person who looks after them. The beneficiary is the person the assets are held for. The assets themselves can be property, cash, investments, or a mix of them.
The part that catches people out is ownership. Once you place an asset into a trust, you no longer own it, the trust does. What you keep is influence over how it is used, because the trust deed, the document that creates the trust, sets the rules the trustees have to follow. That is how a trust lets you give something away and still shape what happens to it.
Why People Set Up Trusts
Trusts are used for all sorts of reasons, and most have nothing to do with avoiding tax. Usually the aim is control, protection, or looking after someone who cannot yet look after themselves. These are the most common.
Protecting Assets for Children or Vulnerable People
A child who inherits outright takes full control of the money at 18 in England and Wales, or 16 in Scotland. A trust lets you hold it back until an age you think is more sensible, or release it in stages.
For a disabled or vulnerable relative, a trust does something more valuable. A Disabled Person’s Trust, which qualifies for special tax treatment, lets trustees manage money for the person without it affecting their entitlement to means-tested benefits. The support reaches them, and the capital stays protected.
Providing for Loved Ones While Keeping Control
A trust lets you provide for family without handing over unrestricted access to a lump sum. You can direct that money is paid out monthly, at set life stages, or only for things like education, housing or care.
That control matters most where a beneficiary is young, inexperienced with money, or facing something difficult such as addiction or a fragile relationship. The trustees can step in and apply the funds sensibly on their behalf.
Managing Inheritance Tax
Inheritance Tax 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 where the residence nil-rate band applies. Those thresholds have been frozen for years and are set to stay fixed until at least April 2030, so rising asset values pull more estates into tax every year.
Trusts can help by moving assets out of your taxable estate. A gift into a bare trust counts as a potentially exempt transfer, so if you survive seven years, it falls outside your estate completely.
Discretionary trusts work differently. They are chargeable lifetime transfers, and can carry a 20% entry charge on value above the nil-rate band, ten-yearly charges of up to 6%, and exit charges. Even with those, they can cap future growth in your estate or spread allowances across generations.
Avoiding Probate Delays
Probate is the legal process of dealing with someone’s estate after they die, and it can take months. While it runs, assets are often frozen and beneficiaries cannot reach the money.
Assets held in trust are not part of the estate, so they do not wait on probate. That can get funds to people faster, and for business owners or those with assets abroad, it can avoid a costly delay.
Passing Wealth Down the Generations
Families often use trusts to keep wealth intact for the future. Putting assets in trust can help keep them in the family line, rather than lost to a divorce settlement, a bankruptcy, or one person’s poor decisions.
Trustees are legally bound to manage the assets for current and future beneficiaries. That allows a property, an investment portfolio or a business to be looked after across generations, while still leaving room to respond as circumstances change.
Providing for a New Spouse While Protecting Children
In blended families, people often want to look after a surviving spouse without disinheriting children from an earlier relationship. A trust can do both.
An interest in possession trust can give your spouse the income from your estate, or the right to live in a property, for the rest of their life. The capital then passes to your children. Your partner is supported, the estate reaches the people you intend, and the risk of a family dispute drops.
Passing On a Family Business
Handing a business to the next generation is rarely simple, and a trust lets you transfer shares gradually while keeping control in your lifetime. The tax position has changed, though, and the old assumption that a trading business passes free of Inheritance Tax no longer holds.
Business Relief still exists, but from 6 April 2026 the 100% rate is capped. Qualifying business and agricultural assets get full relief only on the first £2.5 million of combined value, with anything above that relieved at 50%, an effective 20% rate. Shares on AIM and other unlisted markets now get 50% rather than 100%. Trusts have their own £2.5 million allowance that refreshes every ten years, though where a settlor creates several trusts on or after 30 October 2024, that allowance is split between them.
Take a trading company worth £4 million passed into a trust. Before the change, Business Relief could have covered the lot. Now the first £2.5 million is fully relieved, the next £1.5 million is relieved at 50%, and £750,000 is left exposed to Inheritance Tax. The relief is still valuable, but it needs planning rather than assumption.
Charitable Giving
A charitable trust is a long-term, tax-efficient way to support causes you care about. You can set one up during your life or through your will, for one or more registered charities or qualifying purposes.
Gifts into a charitable trust are free of Inheritance Tax, and the trust itself is exempt from Income Tax and Capital Gains Tax on its qualifying activities. That makes it a strong option for legacy planning when you want a say in how your giving is used.
Protecting Assets from Divorce or Bankruptcy
No structure protects against every legal claim, but a discretionary trust can put distance between a beneficiary and the underlying assets. In a divorce or bankruptcy, a court will look closely at whether the trust is genuine and independent, but one set up properly may keep the assets out of direct reach.
That makes a trust a useful way to ring-fence family wealth from risks a child or other beneficiary might run into later.
The Main Types of Trust
There are many kinds of trust, each built for a particular job, and picking the right one is not a job for guesswork. These are the ones you’re most likely to come across:
- Bare trust: the simplest form, where the beneficiary has an immediate and absolute right to both the income and the capital, often used to hold assets for a child until they come of age.
- Interest in possession trust: the beneficiary is entitled to the income, such as rent, but not the capital, which is common in wills where a spouse receives income for life and the capital later passes to children.
- Discretionary trust: the trustees decide when, how much, and to whom income and capital are paid, which suits cases where you want flexibility or need to protect beneficiaries whose circumstances are uncertain.
- Accumulation trust: a form of discretionary trust where income can be rolled into the capital rather than paid out, often used while beneficiaries are still children.
- Mixed trust: a combination of types, such as one part discretionary and one part interest in possession, used for more complicated family arrangements.
- Settlor-interested trust: a trust the settlor, or their spouse or civil partner, can benefit from, where the income is taxed on the settlor rather than the trust or the beneficiaries.
- Disabled Person’s Trust: set up for someone who meets HMRC’s definition of disabled, such as a person receiving Personal Independence Payment, and given favourable treatment including exemption from the ten-year and exit charges that apply to most discretionary trusts.
- Non-resident trust: a trust whose trustees are not UK resident, often used in offshore planning, where since 6 April 2025 whether non-UK assets fall within Inheritance Tax depends on the settlor’s long-term UK residence rather than their domicile.
- Charitable trust: set up purely for charitable purposes such as education or the relief of poverty, with full exemption from Income Tax, Capital Gains Tax and Inheritance Tax where it meets the conditions in charity law.
The right trust depends entirely on your circumstances and what you want it to do, which is why it pays to get advice before committing to a structure.
Setting Up a Trust
The process varies with the type of trust, but it usually runs through the same five stages:
- Decide what you want it to achieve: work out who should benefit, how and when they should receive support, and which assets you want to put in. The answers point to the right type of trust.
- Choose your trustees: they will run the trust, so choose carefully. You can appoint one or several, and they can be family, friends, or a professional trustee service.
- Draft the trust deed: this is the legal document that creates the trust, and it needs a solicitor. It records the settlor, trustees, beneficiaries, the assets, and the terms.
- Transfer the assets in: once the deed is signed, the assets are legally moved into the trust, and how that works depends on the asset. Property, for example, is transferred through the Land Registry.
- Register the trust: most trusts now have to be registered with HMRC through the Trust Registration Service, whether or not they pay tax, usually within 90 days of being created. Late registration can bring penalties.
The Pros and Cons of Trusts
Trusts are powerful, but they are not right for everyone, so it helps to weigh both sides. On the plus side, a trust can:
- Protect assets from legal claims, creditors, and in some cases Inheritance Tax.
- Control how and when your beneficiaries receive what you leave them.
- Provide for someone who cannot manage money themselves.
- Keep your affairs private and outside the probate process.
Set against that, the drawbacks are real:
- Trusts can be complex and costly to set up and run.
- You give up ownership of whatever you put in.
- Trustees take on ongoing legal and administrative duties.
- Trusts have their own tax rules, which are involved and change often.
For most people, a trust earns its place where there are real assets to protect or a family situation that needs careful handling.
How Trusts Are Taxed
Tax is the most involved part of trusts, partly because they have their own tax rules and partly because those rules keep moving. Here is where things stand now:
- Income Tax: a trust with total income of £500 or less in a year pays none, but once income passes £500 the whole amount is taxable, not just the excess. Discretionary and accumulation trusts pay the trust rate of 45%, or 39.35% on dividends. An interest in possession trust is different, as the beneficiary is treated as receiving the income and taxed at their own rates, while a bare trust is taxed as though the income were the beneficiary’s. Where a settlor has more than one trust, the £500 is shared between them, down to a minimum of £100 each.
- Capital Gains Tax: trustees pay at the higher rate of 24% when they sell or transfer trust assets at a profit, and the trust’s annual exempt amount is £1,500, half of an individual’s. In some cases a gain can be deferred when assets move into or out of a discretionary trust.
- Inheritance Tax: treatment depends on the type of trust. Some, such as bare trusts, are transparent, so the assets count as still belonging to the settlor. Others, such as discretionary trusts, fall within the relevant property regime and have their own charges on entry, at each ten-year anniversary, and on exit.
Trust taxation is a technical area, and the rules are reviewed almost every year, so up-to-date advice before you act is essential.
Get Expert Advice from Double Point
At Double Point, our chartered accountants understand how trusts work and how the current rules apply to real families. Whether you are considering a trust to protect assets, provide for someone you love, or manage an Inheritance Tax bill, we can take you through it from start to finish. Our service covers:
- Advising on whether a trust suits your circumstances at all.
- Recommending the most appropriate type of trust.
- Helping transfer assets into the trust correctly.
- Advising on the tax that will apply, under the rules as they stand.
- Providing ongoing support once the trust is up and running.
If a trust might be right for you, book a free consultation and our team will help you find the best way forward.