Confidence and dependability are usually what come to mind when we hear the word “trust”. In the usual sense, it is about being able to rely on someone or something. It is perhaps no coincidence that the same word is used for the legal structure familiar in UK tax regime.
In that context, a trust is a formal arrangement under which assets are held by trustees for the benefit of beneficiaries (the definitions of which we will get in a minute).
Those trustees are expected to manage the assets responsibly, but unlike the meaning of “trust” in its ordinary sense, the arrangement is backed by legal duties rather than personal goodwill.
Despite of its reputation, trusts are not just for large estates or the ultra-rich individuals and families with complex family wealth structures.
Trust us, by the end, you should have a good sense of what a trust is, how it works in the UK, when it can help, and what you need to think about before going any further.
What Exactly is a Trust?
A trust is a legal arrangement where one person hands over assets to be looked after for someone else. The person who sets it up is called the settlor. The people who look after the assets are the trustees. The people who are meant to benefit are the beneficiaries.
Once assets go into the trust, the trustees become the legal owners. They are on the paperwork. However, they are not free to do as they please. They must use the assets in line with the trust deed (a rule book that sets out who can benefit, when, and on what terms) and for the benefit of the beneficiaries.
The Settlor
The Trustee(s)
The Beneficiary
The benefactor who establishes the trust by transferring assets into it. | The legal owners who hold and manage trust property. | The person or class of persons entitled to benefit from the trust. |
The settlor's intentions, as expressed in the trust deed, govern how trustees must act. | Trustees owe fiduciary duties to beneficiaries and must act in accordance with the trust deed's terms. | Beneficiaries may be named individuals or defined by reference to a class (such as 'my grandchildren' or 'my issue'). |
Once assets are settled, the settlor generally relinquishes control, though certain retained powers can trigger adverse tax consequences. | They possess significant powers but must exercise them prudently, impartially, and exclusively for beneficiaries' benefit. | Their rights vary considerably depending on the trust structure employed. |
Cell | They usually hold the legal title. | They usually hold the beneficial interest. |
How Did Trusts Start, and Why Does it Matter?
Trusts have a long history in English law. Originally, they grew out of arrangements where landowners leaving the country would put land in the name of a trusted friend to look after it. The legal title moved, but everyone understood the land was really being held for the original owner or their family.
Over time, the courts recognised two separate ideas: who holds legal title and who is meant to enjoy the benefit. That distinction sits at the heart of modern trust law.
They are designed to separate control from benefit. You can give away value but still make sure it is managed in a controlled way, often over many years and across generations.
Originally, trusts were used mainly for land and for traditional landed estates. Now they are used for cash, portfolios, businesses and property, in families that specialise in professional or business work, not just in old estates.
How Are UK Trusts Used Today?
In modern UK planning, trusts are used for three broad reasons:
First, to protect people. Parents and grandparents use trusts where they want to support children or vulnerable relatives but do not want them to receive assets outright. This might be because of age, disability, relationship concerns or simply lack of financial experience.
Second, to manage succession. Trusts can be used to manage what happens when you are in a second marriage, when there are children from previous relationships, or when you want to keep a business or property within a particular family line.
Third, to manage tax and risk. Trusts are not magic tax shelters, but they can help shape how and when tax arises and can sit alongside inheritance tax, capital gains tax and income tax planning. They also provide a degree of protection if a beneficiary later divorces or becomes subject to a claim, although they are not guaranteed shields.
The key point is that a trust is a planning tool, not a goal in itself. You start with the problem you are trying to solve and then ask whether a trust is the right tool.
Understanding Trusts: The Theme Park Analogy
The best way to understand how a trust works (in the broadest sense) is through a simple analogy. Think of a trust like a theme park.
The Trust = The Theme Park
A set of rules for how things work. The trust itself is not a separate legal person like a company, but it is a distinct structure with its own rules, assets, and purposes.
The Trustees = Park Managers
The Trust Assets = Everything of Value
The Trust Deed = The Rulebook
They hold the keys, make sure the park runs properly, and must follow the park rules and the law. | Ticket income, rides, food stalls, merchandise, and the bank account. | Who gets access, when, and on what terms. |
They cannot just do whatever they like. They must act for the right people. | These are held by the managers but belong beneficially to those entitled under the rulebook. | The settlor writes the rulebook at the outset. The trustees must follow it. |
Even though they control the gates and the money, they do not own the park for themselves | The assets sit in a separate pool, distinct from the trustees' own property. | Beneficiaries are the people entitled to enjoy the park's benefits, either now or later. |
Their job is to run the park fairly, within the rules, and keep proper records. This is a simple analogy, of course. Different types of trust can work in different ways, and the detail depends on the trust terms and the relevant law.
What is the current UK position on trusts?
Legally, trusts are well established and recognised in UK law. The courts have developed the main principles over centuries. On top of that, Parliament has set out detailed tax rules in several Acts. HMRC then publishes guidance to explain how those rules apply in practice.
From a policy point of view, there are three clear trends.
First, transparency. Most express trusts now have to register on the Trust Registration Service. This means information about the settlor, trustees and beneficiaries is recorded. You can no longer assume that trusts are invisible to the system.
Second, alignment. The government has made a deliberate effort to stop trusts from being used to secure tax outcomes that are far better than simply owning assets personally. In broad terms, the goal has been to tax similar outcomes in a similar way.
Third, anti-avoidance. There are specific rules for trusts where the settlor or their spouse can still benefit, rules about gifts with reservation, and complex layers of rules for non-UK trusts. All of this reflects a clear direction of travel: trusts are legitimate if they meet real family or commercial needs, but they are not intended to be used as simple tax loopholes.
For someone considering a trust now, the message is that trusts are allowed, respected and often very useful, but they come with compliance obligations, and they sit under closer HMRC scrutiny than they did a generation ago.
Main types of trust you are likely to hear about
There are many technical labels, but at an introductory level you only need to understand the main shapes.
A bare trust is the simplest. The beneficiary is absolutely entitled to the assets once they are old enough. The trustees are effectively holding the assets in their name for the beneficiary, who can call for them outright. This is often used for very simple arrangements for children.
An interest in possession trust gives a named person the right to receive the income as it arises. That person is often a spouse or partner. The capital is usually earmarked for other beneficiaries on their death, often children. This is popular where someone wants to provide for a new spouse but ultimately keep capital for children from a previous relationship.
A discretionary trust gives the trustees discretion over which beneficiaries benefit, when and by how much. Beneficiaries are usually named as a class, such as “children and remoter issue”. No one has a fixed right to income or capital. This gives maximum flexibility but also places real responsibility on trustees to exercise their powers fairly and wisely.
There are more specialised forms, like disabled person’s trusts and bereaved minors trusts, which are designed for particular situations and carry their own tax regimes. There are also non-resident trusts, which bring international and anti-avoidance rules into play. These are specialist areas.
If you are considering a trust, the first question is always what you need it to do. Only then can you choose the right type.
Do you have to register a trust?
In many cases, yes. This is something that often surprises people.
Most UK express trusts now need to register on HMRC's Trust Registration Service, even if they do not have any immediate tax to pay. There are some excluded categories (known as Schedule 3A trusts) which do not need to register unless they become taxable.
Examples of such trusts are trusts created by court order, life insurance policies that only pay out on death or illness, charitable trusts, and will trusts that are wound up within two years of death. If none of those exclusions apply, registration will almost certainly be required.
For non-UK trusts, the registration triggers are more specific. A non-UK trust must register if it acquires an interest in UK land on or after 6 October 2020, regardless of where its trustees are based. Separately, a non-UK trust must also register if it has at least one UK resident trustee and enters into a business relationship with an obliged entity, such as a financial institution, accountant, tax adviser, legal professional or estate agent.
When trustees register, they provide details such as the trust name, date it was set up, the settlor, trustees, beneficiaries or the class of beneficiaries, and certain information about UK land or property if held. Taxable trusts give more detail, particularly about the nature and value of assets.
Registration is not a one-off exercise. If any details change (such as a trustee or beneficiary changing, or certain transactions taking place) trustees must update the register within 90 days of that change occurring.
If a trust has a UK tax liability, the trustees will also need a Unique Taxpayer Reference and will be required to file annual Self-Assessment tax returns. That is separate from the registration obligation, although linked in practice.
All of this means that anyone thinking of setting up a trust must accept that administration and formal compliance are part of the package.
Questions you must ask yourself before you create a trust
If you are at the stage of asking “Do I need a trust?” these are the key questions to ask yourself.
First, what is the main objective? If you had to describe it in one sentence, what would you say? For example, “I want to protect my children from inheriting too much too young” or “I want to provide for my current spouse but make sure capital goes to my children later” or “I want to ring fence assets from future relationship breakdowns”. If you cannot express the objective clearly, it is usually too early to design a trust.
Second, are you comfortable giving up ownership and some control? Once assets go into a trust, they are no longer yours in the same way. You can use letters of wishes and the choice of trustees to shape what happens, but you are not supposed to treat trust assets as if they are still yours. For many people, this psychological step is harder than the tax or legal work.
Third, who should be trustee? Trustees must act in the best interests of all beneficiaries, follow the trust deed, keep records, deal with tax and registration, and make decisions that can have long term consequences. This is not a role to hand out casually. Using at least one professional trustee can be sensible where large or complex assets are involved.
Fourth, what assets are you thinking of putting in? Cash and portfolios are simpler. Property, private company shares and other illiquid assets raise valuation, liquidity and control issues. For example, if the trust will one day face charges based on the value of its assets, will it have cash to pay those charges, or will it be forced to sell?
Fifth, how does the trust fit with everything else? A trust needs to sit alongside your will, any life assurance, pension nominations and any business or farming succession plans. It should not be created in isolation, or you risk wasting reliefs or creating conflicts between documents.
Finally, are you prepared for ongoing cost and administration? Trusts are long term structures. Set up costs, annual accounts, tax returns, possible valuations and professional advice all need to be factored in. A trust can be very worthwhile, but it is rarely a “free” solution.
If you answer these questions honestly, you will often find that your thinking becomes much clearer very quickly. In some cases, you will conclude a trust is exactly what you need. In others, you may decide a simpler route makes more sense.
A brief overview of the trust process
The detailed process deserves its own article, but it helps to have a simple map in your mind.
Things usually start with a planning meeting. You discuss your goals, family circumstances, asset base and time horizon. The question at this stage is not “What trust should I use?” but “Is a trust actually the right approach at all?”
Once the decision in principle is made, you work out the trust type and the people involved. You identify trustees, beneficiaries and any key conditions. You also decide which assets will go in and when. At the same time, your adviser will consider inheritance tax, capital gains tax and income tax implications.
A solicitor then drafts the trust deed and any linked documents, such as letters of wishes and adjustments to your will. You review these carefully, because once signed and assets are transferred, unwinding a trust can be difficult and costly.
Assets are then transferred into the trust. This is often the trigger point for any immediate inheritance tax or capital gains tax issues, so it needs to be carefully timed and supported by appropriate valuations and evidence.
After that, the trustees deal with registration, obtain a tax reference if needed, and start the ongoing work of managing the trust. This includes investment decisions, records of meetings and key decisions, compliance with filing deadlines and periodic reviews as family circumstances change.
Eventually, at a time set in the deed or chosen by the trustees, the trust may be wound up and assets passed on to beneficiaries, or its terms may be varied where the law allows.
Taxes you need to have on your radar
This is an introductory article, so we will only touch the main points here. Each tax area can be explored in depth separately.
For inheritance tax, you need to understand that putting assets into some types of trust can itself be a taxable event. Transfers into many discretionary style trusts are “chargeable lifetime transfers”. If the value you have transferred to such trusts in the last seven years is above your available nil rate band, there can be a 20 per cent inheritance tax charge on the excess at the time the trust is set up. Later on, those trusts may be subject to periodic charges on each tenth anniversary and charges when capital leaves.
For income tax, the picture depends on the trust type. In a bare trust, income is usually taxed on the beneficiary as if they owned the asset directly. In an interest in possession trust, the income beneficiary is generally taxed on the income they are entitled to. In discretionary and accumulation trusts, the trustees pay income tax at full trust rates (currently 45% on most income and 39.35% on dividends, on all income above £500). There are also specific rules for trusts where the settlor or their spouse can still benefit, which may tax income on the settlor instead.
For capital gains tax, trustees are broadly treated as a separate “tax person”. They may pay capital gains tax when they sell or transfer trust assets. There is a trust annual exemption. In some situations, gains can be deferred when assets move into or out of a trust, but only if strict conditions are met.
Alongside all of this sit the registration and reporting obligations. Many trusts must file annual tax returns and pay tax by the usual deadlines. Most express trusts now required to register must also keep their Trust Registration Service data up to date.
If you are at an early stage, you do not need to master every rule, but you do need to understand that a trust will change how and when tax arises, and that professional advice is essential before you act.
Do you actually need a trust?
Finally, the question that usually matters most to a potential client: is a trust really necessary, or is it an overcomplication?
A trust may be worth serious consideration if you:
On the other hand, if your main aim is purely to “save tax” in the short term, and you do not have a clear family or asset protection reason, a trust may not be the right answer. There are often simpler and cheaper ways to use allowances, reliefs and straightforward gifts.
The real value of a trust comes when it reflects a clear long-term plan for your family or estate, not just a reaction to tax thresholds.
So, to answer the very first question, do trusts really live up-to their name? My answer would be yes, but only when they are the right tool for the right problem, set up properly, and maintained with care.
