Are Trusts Right for You?
A practical guide to UK trusts- what they do, what they cost, and whether they belong in your financial plan
Dear Reader,
Trusts have an image problem.
Mention them at a dinner party and people assume you’re either exceptionally wealthy or hiding something. The reality is far more mundane: trusts are simply a legal structure for holding assets and they’re used by everyone from grandparents setting aside money for school fees to business owners protecting company shares.
But here’s the uncomfortable truth most advisers won’t tell you upfront: trusts aren’t right for everyone. They add complexity, trigger specific tax charges, and require ongoing administration. For some people, they’re transformative. For others, they’re an expensive distraction.
This article will help you figure out which camp you fall into.
What Is a Trust, Really?
Strip away the legal jargon and a trust is simply a way of separating legal ownership from beneficial enjoyment.
Three roles make up every trust:
Settlor - Creates the trust and transfers assets into it
Trustee(s) - Legally owns and manages the assets according to the trust deed
Beneficiary/ies - Receives the benefit—either income, capital, or both
The power of this arrangement lies in what it enables:
Control beyond the grave — You can dictate how assets are used decades after you’re gone
Protection — Assets held in trust can be shielded from beneficiaries’ creditors, divorcing spouses, or poor financial decisions
Tax planning — When structured correctly, trusts can reduce inheritance tax exposure across generations
But notice that word: can. Trusts don’t automatically deliver these benefits. Everything depends on choosing the right structure, funding it appropriately, and understanding the tax consequences.
The Four Trust Structures You Need to Know
While trust law allows for endless customisation, most UK trusts fall into four core categories. Each balances control, access, and taxation differently.
1. Bare Trusts
How it works: The beneficiary has an absolute, immediate right to both income and capital. Trustees are merely custodians, they hold the assets but have no discretion over distribution.
Typical use: Grandparents gifting to minor grandchildren. The child gains full control at age 18 (England/Wales) or 16 (Scotland).
Tax treatment: Income and gains are taxed as the beneficiary’s, not the trust’s. This can be advantageous if the beneficiary has unused allowances but watch out for the parental settlement rules (gifts from parents generating over £100 income annually are taxed on the parent until the child turns 18).
Key limitation: Zero flexibility. Once the beneficiary reaches adulthood, the assets are theirs regardless of maturity or circumstances.
2. Interest in Possession Trusts (Life Interest Trusts)
How it works: One beneficiary (the “life tenant”) receives income generated by the trust during their lifetime. When they die, the capital passes to other beneficiaries (the “remaindermen”).
Typical use: Protecting a surviving spouse while ensuring children from a previous marriage eventually inherit. Also common in wills where the family home is placed in trust.
Tax treatment: The life tenant is taxed on income as it arises. For inheritance tax, the trust assets are typically treated as part of the life tenant’s estate, meaning IHT applies on their death, not when the trust was created.
Key limitation: The life tenant must receive all income; you can’t accumulate it within the trust. Less flexible than discretionary structures
3. Discretionary Trusts
How it works: Trustees have complete discretion over who receives what, when, and how much. Beneficiaries have no automatic entitlement, they’re simply part of a “class” of potential recipients.
Typical use: Complex family situations, protecting vulnerable beneficiaries, maintaining flexibility when future needs are uncertain, business succession planning.
Tax treatment: This is where things get complicated:
Entry charge: Transfers above the nil-rate band (currently £325,000) trigger an immediate 20% IHT charge on the excess
10-year periodic charge: Every decade, the trust is assessed for IHT at up to 6% of the value above the nil-rate band
Exit charges: When capital leaves the trust, a proportionate charge may apply based on time since the last 10-year anniversary
Income tax: Trust income above £1,000 is taxed at 45% (dividends at 39.35%)
Key limitation: Administrative burden and cost. You’ll need professional trustees or significant time commitment, plus ongoing accounting and tax returns.
4. Accumulation Trusts
How it works: Trustees can retain income within the trust rather than distributing it, allowing the fund to grow over time.
Typical use: Building wealth for beneficiaries who aren’t yet ready to receive it, commonly structured to pay out at age 25 or later.
Tax treatment: Same regime as discretionary trusts (entry, periodic, and exit charges). Accumulated income is taxed at trust rates.
Key limitation: The tax treatment has made pure accumulation trusts less attractive than they once were. Many practitioners now use discretionary trusts with accumulation powers instead.
The Relevant Property Regime: What You Must Understand
If you’re considering a discretionary or accumulation trust, the relevant property regime is non-negotiable knowledge. This is the tax framework that governs most modern trusts, and misunderstanding it is where costly mistakes happen.
Here’s how it works in practice:
Scenario: You place £500,000 into a discretionary trust.
Entry charge: £500,000 − £325,000 (nil-rate band) = £175,000 × 20% = £35,000 IHT payable immediately
10-year charge: If the trust is worth £600,000 at the 10-year anniversary, the calculation (simplified) applies a rate of up to 6% to the value exceeding the nil-rate band. Actual calculations are more complex, factoring in previous distributions and cumulative transfers.
Exit charge: If you distribute £100,000 to a beneficiary in year 7, a proportionate charge applies based on the last periodic charge calculation.
The critical planning point: You can settle up to £325,000 into trust without triggering an immediate entry charge. But this uses your nil-rate band—the same allowance that shelters your estate from IHT on death. Every seven years, this “resets,” allowing another potentially exempt transfer.
The Hidden Costs Nobody Mentions Upfront
Trust costs extend far beyond setup fees. Before proceeding, factor in:
For a £300,000 discretionary trust with professional trustees, you might pay £3,000–£5,000 annually in combined fees. Over 20 years, that’s £60,000–£100,000 before accounting for inflation.
The uncomfortable question: Will the tax savings exceed these costs? For smaller estates, often the answer is no.
When Trusts Make Sense
Trusts tend to add genuine value in these scenarios:
1. Your estate exceeds the inheritance tax thresholds
The nil-rate band (£325,000) plus residence nil-rate band (up to £175,000) gives individuals up to £500,000 IHT-free, or £1 million for married couples leaving their home to direct descendants. If your estate significantly exceeds this, trust planning may reduce the 40% IHT exposure.
2. You have blended family considerations
Life interest trusts can protect a surviving spouse while ensuring children from previous relationships ultimately inherit. Without this structure, assets could pass entirely to a new spouse’s family.
3. A beneficiary needs protection
This includes:
Minors who shouldn’t control large sums at 18
Adults with disabilities (special trusts exist with favourable tax treatment)
Beneficiaries with addiction issues, spendthrift tendencies, or vulnerable to financial exploitation
Beneficiaries in unstable marriages or high-risk professions
4. You want control beyond your lifetime
Trusts let you specify conditions, timing, and purposes for distributions. A will gives assets outright; a trust gives assets with strings attached.
5. Business succession planning
Trusts can hold company shares, enabling gradual transfer of control while the founder retains influence through trustee roles.
When Trusts Don’t Make Sense
Your estate falls within IHT thresholds
If your estate is comfortably below the available allowances, trust complexity may cost more than it saves.
You want simplicity
Trusts require ongoing administration, tax filings, and potentially professional fees indefinitely. If this sounds exhausting, simpler alternatives (outright gifts, pensions, ISAs) may serve you better.
You can’t commit to a 7-year survival period
Many trust-based IHT strategies rely on the settlor surviving seven years. If age or health make this unlikely, the planning benefit diminishes substantially.
You’re the primary beneficiary
“Settlor-interested” trusts—where you or your spouse can benefit, receive no IHT advantages. The assets remain in your estate for IHT purposes, but you still bear the administrative burden.
You need access to the capital
Once assets enter most trusts, getting them back is difficult, tax-inefficient, or impossible. Don’t use a trust if you might need the funds.
Alternatives Worth Considering
Before committing to a trust, ensure you’ve maximised simpler options:
Pensions: Tax-efficient growth and accessible from age 55 (rising to 57). However, from 6 April 2027, unused pension funds will form part of your estate for IHT purposes,ending their long-standing exemption. Factor this into any estate planning that relies on pension wealth passing tax-free.
ISAs: No IHT benefit, but tax-free growth and full access
Direct gifts: Give assets away and survive seven years, no trust needed
Life insurance in trust: A simple trust structure specifically for life policies; avoids most complexity
Deeds of variation: Redirect inherited assets within two years of death, potentially into trust, with retrospective tax treatment
A Decision Framework
1. Is my estate likely to exceed IHT thresholds?
└── No → Trust probably unnecessary for tax reasons
└── Yes → Continue
2. Do I have specific control or protection concerns?
└── No → Consider simpler gifts
└── Yes → Continue
3. Am I comfortable with irrevocable transfer of assets?
└── No → Trust isn't suitable right now
└── Yes → Continue
4. Can I afford setup and ongoing costs without impacting my lifestyle?
└── No → Focus on maximising other allowances first
└── Yes → Continue
5. Do I have suitable trustees in mind?
└── No → Consider whether professional trustees justify the cost
└── Yes → Trusts may be appropriate—seek specialist advice
Next Steps
If you’ve reached the end of this framework and trusts still seem relevant, here’s what I’d recommend:
Get a proper estate valuation — Include pensions, death-in-service benefits, and property. Many people underestimate their IHT exposure.
Consult a specialist — Trust planning sits at the intersection of law, tax, and financial planning. You need someone qualified in all three. Look for a STEP (Society of Trust and Estate Practitioners) member or a solicitor with private client expertise.
Model the numbers — Any adviser recommending a trust should show you projected costs versus savings over 10, 20, and 30 years.
Consider your trustees carefully — This decision matters as much as the trust structure itself. Poor trustees can unravel the best planning.
Final Thought
Trusts are powerful, but power without purpose is just complexity. The right trust, properly structured, can protect your family’s wealth for generations. The wrong one is an expensive administrative burden that benefits no one except the professionals managing it.
The question isn’t whether trusts are good or bad. It’s whether a trust solves a specific problem you actually have.
If it does, proceed. If it doesn’t, your money is better deployed elsewhere.
Thanks for reading,
Ollz
The information provided in this article is for informational purposes only and reflects my personal opinions and analyses. It should not be considered financial advice or a recommendation to buy or sell any securities. Investing in the stock market involves risks, and past performance is not indicative of future results. Readers are encouraged to conduct their own research and consult with a qualified financial advisor before making any investment decisions. I do not assume any responsibility for any financial losses or consequences that may arise from reliance on the information provided