Trusts in the UK: 20 Essential Questions Answered About Tax, Inheritance, and Property Planning

Nearly half of Britain’s millionaires admit they haven’t done any inheritance tax planning – a scary stat when Inheritance Tax (IHT) receipts hit a record £7.1 billion in 2022/23. If you’re a high-net-worth individual or business owner, ignoring trusts could mean leaving a hefty tax bill to your heirs. I’ve seen smart families use trusts to protect wealth for generations – and I’ve seen others miss out by muddling the details. In this post I’ll answer 25 key questions about UK trusts (using real examples where I can) so you can see if a trust might fit your estate and property plans.

What is a trust, and who’s involved?

A trust is a legal arrangement that separates legal and beneficial ownership of assets. In practice, it means one person (the trustee) holds assets “on trust” for someone else (the beneficiary). The person who creates the trust is called the settlor. For example, I once helped an elderly client (the settlor) transfer some cash into a trust, naming herself as trustee and her grandchild as beneficiary. From that moment, the grandchild had a right to benefit from the money, but the trustee (my client) kept legal control until the child grew up.

In simpler terms: the trustee is the legal owner on paper, and the beneficiary is the equitable owner in practice. If the trustee messes up, the beneficiary can go to court (trustees owe strict fiduciary duties). There must always be at least one trustee, but often two or more (for example, a trusted advisor and a family member). The settlor can even name themselves as trustee – but if they do, that triggers extra tax rules (a “settlor-interested” trust).

The Law Society sums it up neatly: “In a trust, assets are held and managed by one person (the trustee) to benefit another (the beneficiary). The person providing the assets is called the settlor.”

Key parties:

Settlor: The person who puts assets into the trust (must have legal capacity).

Trustee(s): The legal owner(s) of trust assets – they manage investments, file tax returns, and follow the settlor’s instructions in the trust deed.

Beneficiary(ies): The people (or class of people) who benefit – they might get income, capital, or both, depending on the trust terms.

Why create a trust? What are the benefits?

People use trusts for many reasons. In a word, control and protection. Common purposes include:

- Protecting family assets. A trust can prevent young or vulnerable heirs from squandering an inheritance, or protect assets if someone divorces. (For instance, I advised a divorcing contractor to put certain business shares into a trust so ex-spouse claims would be excluded.)

- Planning for minors or incapacity. If a beneficiary is a child or has special needs, a trust ensures someone responsible manages the money until they’re old enough or able.

- Inheritance planning. Families use trusts to pass on wealth in a tax-efficient way. Unlike a straight gift, a gift into many trusts (combined with other planning) can reduce the estate chargeable to IHT. And trusts let you stipulate exactly who gets what, when. For example, one client gave a property in trust to provide income for her spouse during his lifetime, then pass the property to her children when he died.

- Avoiding probate/intestacy uncertainty. Assets in a trust don’t form part of your estate at death (typically), so you can bypass some probate hurdles. (This is especially useful for property planning – see below.)

- Flexibility. If family circumstances change, a discretionary trust (below) lets trustees adjust distributions among beneficiaries as needed.

Imagine a simple example: a grandmother names a discretionary trust for her grandchildren, with her two daughters as trustees. This lets the daughters decide how and when to give money to the grandkids (say, for school fees or a house deposit) rather than handing the money over outright. That trust “holds” the money for the grandchildren’s benefit, under the trustees’ control.

People often overlook trusts because they seem complicated or costly, but they’re just “pot” around assets. With clear deeds and good advice (for example, from chartered certified accountants in Kent like us at Cannons), trusts become straightforward planning tools.

What types of trusts are there?

There are many trust types in UK law. The most common personal/family trusts are:

- Bare Trust (Absolute Trust): The simplest. The trustee holds the asset for one known beneficiary who is entitled to everything as soon as they reach 18 (in England/Wales). Technically the trustee has the title, but the beneficiary can demand the asset anytime after adulthood. This is often used when parents want to gift money or shares to children but manage them until adulthood. Tax note: A bare trust’s income/capital gains are taxed on the beneficiary, not the trustee.

- Interest-in-Possession Trust (Life Interest Trust): One or more beneficiaries get the income from the trust assets right away, but not the capital. For example, a widow might be given the income from her late husband’s estate during her life, and the estate assets pass to the children only after her death. The life tenant pays income tax on what they receive, but trustees pay the tax up front at the basic rate (so the beneficiary gets a tax credit). This type is often used in family situations: “My wife can live off the property rent, and when she dies the house goes to our kids.”

- Discretionary Trust: The trustees have full discretion about how to use the trust’s income and capital among a class of beneficiaries. For instance, “my three kids and their families.” The settlor says which people can benefit, and the trustees choose who gets payments, when, and how much. It’s very flexible but the tax treatment is harsh: trustees pay top rates (45% on income, 39.35% on dividends) and there are extra IHT charges (see below). These are widely used for grandchildren or distant relatives. For example, one client set up a discretionary trust for her grandchildren – her own children were trustees, giving them flexibility to support any grandchild who needed money (for example, university or first home).

- Protective/Shield Trust: A type of discretionary trust designed to protect assets if a beneficiary gets into debt or financial trouble. (Not common in simple estate planning, more for asset protection.)

- Trust for a Vulnerable Person: If the only beneficiary is someone disabled or an orphan, special rules apply – notably much lower income tax on the trust (often none beyond basic allowances). For example, a parent might leave money in a special needs trust for a disabled child. (My friend’s cousin had a disabled son; they set up a vulnerable beneficiary trust so his pension and savings wouldn’t be fully taxed each year.)

- Mixed Trusts: These blend features. For example, half could give one beneficiary a life interest, and the other half remain discretionary.

- Will (Testamentary) Trusts vs. Lifetime (Inter Vivos) Trusts: If you set up a trust in your will, it’s funded at death. That’s still a trust (think “trusts under a will”). A trust created while you’re alive is “inter vivos”. The tax rules can differ between the two in some cases.

Each type has its uses. It’s like picking a tool: a bare trust for straightforward gifts to grown children; an IIP trust to look after a spouse; a discretionary trust for future generations.

Quote: “In a trust, assets are held and managed by one person (the trustee) to benefit another (the beneficiary). The person providing the assets is the settlor.”

How do you actually create a trust?

Great question. Legally, there are formal requirements. But in practice you’ll usually hire a solicitor or advisor to draw up a trust deed (or include trust terms in your will). Key steps and principles:

- Certainty of intention: You must clearly intend to create a trust, not just make a gift. The wording matters. Phrases like “in trust for” or “to hold for the benefit of” leave no doubt. The courts even look beyond form: remember Paul v Constance, where a casual “we’ll share it equally” by a boyfriend and girlfriend was held to create a trust. But avoid wishy-washy terms like “I hope” or “in full confidence” – those can fail to make a binding trust.

- Certainty of subject matter: Be exact about the assets. Say “all my shares in X Ltd” or “the house at 123 High Street”; don’t say “some of my investments.” A trust must identify which assets and which portion of them are in the trust.

- Certainty of objects (beneficiaries): You must clearly describe who benefits. “All my children and grandchildren” is okay because you can identify those people. “All my friends” is too vague (see Brown v Gould – “old friends” was too uncertain). If it’s a class (like “my grandchildren”), give a clear definition so each person is either in or out.

These “three certainties” (intention, assets, beneficiaries) are fundamental. If any is missing, a court may say the trust is void. So be explicit. In real life, I often tell clients, “Just say ‘I give £X to be held on trust for [Beneficiary]’ and avoid language like ‘in the hope that’.”

- Formalities and transfer: For most assets (cash, shares, chattels) a trust can be created simply by transferring the asset and stating the trust terms. For land, the Law of Property Act requires it to be in writing – effectively a deed. In practice you (the settlor) sign a trust deed or deed of variation, and transfer legal title to the trustee. Often the deed names trustees and beneficiaries, and sometimes includes investment rules or powers. If it’s a will trust, the will itself is the trust instrument.

- Constitution: Normally the asset must actually get into the trust. For example, you must physically transfer shares into the trustee’s name. (There are exceptions – if you say “I transfer my shares to X as trustee” but don’t complete it, courts might still enforce it against the settlor under “equity will not assist a volunteer” principles.)

- Registration: Almost all UK trusts must now be registered with HMRC’s Trust Registration Service (TRS). As of 2024 there were around 733,000 trusts and estates on the register. Any new trust with a UK tax liability (or which was created on or after 1 Sept 2022) must be registered within 90 days. (Otherwise penalties apply.)

Quick example: Suppose Alice wants to create a simple lifetime trust for her daughter Beth. Alice executes a written trust deed saying “I transfer £100,000 to trustees bank account, to be held on trust for my daughter Beth from age 25” – that covers intention (she means to create trust), subject matter (£100k is defined), and object (Beth is clearly named). She also explicitly registers it on TRS. Done.

Always get advice. Even I once needed a refresher on tricky deeds! A lawyer or specialist accountant ensures the trust is valid and tax-efficient.

What taxes do trusts pay?

Tax is where trust planning gets interesting (and complex). You must file annual trust tax returns. Here are the basics:

- Income Tax: Trustees pay tax on trust income they keep (accumulate). The rates depend on trust type: discretionary (and most accumulation trusts) are taxed at the additional-rate levels – 45% on interest/savings income and 39.35% on dividends. Interest-in-possession trusts pay tax at the basic rate (20%/8.75% on dividends) on income; the beneficiary then receives that income with a tax credit. In plain terms, discretionary trusts lose a lot of income to tax (higher than any individual), whereas IIP trusts only pay basic rate before passing income on.

For example, if a discretionary trust earned £1,000 interest, the trustees pay £450 income tax (45%) and £550 goes to beneficiaries (who usually get it with 45% tax already paid). If that £550 goes to a higher-rate beneficiary, they pay nothing more; a basic-rate beneficiary could even reclaim some tax.

- Capital Gains Tax (CGT): Trusts have their own CGT rates. Currently (2025/26) trustees pay 24% on gains (20% on gains without residential property). That’s the same as extra-rate individuals. There is a tiny annual exempt allowance (£1,500 for trusts in 2025/26, vs £3,000 for individuals), and trustees can claim the usual reliefs (like hold-over relief when transferring business assets to beneficiaries).

- Inheritance Tax (IHT): Most lifetime trusts (called “relevant property trusts”) face special IHT charges. When the settlor gifts assets into a trust above the nil-rate band (£325k per person) a 20% charge applies at once (assuming the trust pays it). If the settlor dies within 7 years of that gift, the estate has to top it up to 40%. Then, as long as the trust lasts, every 10 years the trust pays a charge on the value above the current threshold (up to 6%). Also, when assets leave the trust (for example, a distribution to a beneficiary), an “exit charge” (max 6%) can apply. These computations are tricky, so accountants do them.

Important: There are special trust categories with different IHT rules. For instance, disabled person’s trusts, bereaved minor trusts, and “18–25” trusts generally escape the usual 10-year and exit charges. (An 18–25 trust lets assets mature to a beneficiary by age 25, a common will planning tool.)

Quick fact: You can end up paying double duty if not careful. If you gift your home into a trust but continue living in it, HMRC may treat it as a ‘gift with reservation’ – meaning it’s still in your estate. Then your estate could pay IHT on it even after you die (though rules avoid double taxation in practice).

- Other taxes: Trustees may also pay Stamp Duty Land Tax on property transfers, or report overseas income if the trust has international elements. Also remember trusts are subject to UK anti-money laundering rules, hence the registration requirement.

To sum up: Trustees shoulder tax burdens at rates often higher than individuals. But smart planning (e.g. giving income immediately to a beneficiary) can mitigate the impact. The IHT charges seem scary, but in many cases a trust still saves tax compared to leaving everything in your estate with no plan.

How do taxes affect beneficiaries?

Beneficiaries pay tax differently depending on trust type. As the beneficiary, you might have to declare trust income or gains on your personal return, but with special treatments:

- Bare trust beneficiary: You pay tax on any income/gains (like it was your own asset).

- IIP trust beneficiary: You must register for Self-Assessment and report the income you receive. You get credit for tax the trustees have already paid. For example, if a basic-rate taxpayer gets £80 net income (trust paid £20 tax), they just declare the £100 gross (£80 + £20 credit) and pay no extra. A higher-rate beneficiary would have to pay the 25% difference on that £100 gross.

- Discretionary trust beneficiary: Any distribution you get is treated as already taxed at 45%. If you pay additional-rate tax, you owe nothing more. If you’re lower or non-taxpayer, you can claim back some tax (through form R40 or your return).

So while trustees pay top rates, beneficiaries can reclaim some tax if their personal rate is lower. In practice, discretionary trusts are often used for minor beneficiaries (who owe no tax) or higher-rate folks (who also owe no extra).

Bottom line: trust income isn’t taxed twice. It’s taxed once (by trustees) and then any shortfall is topped up by beneficiaries, or excess is refunded. HMRC’s guides explain the exact steps.

What about inheritance tax? When does IHT apply to trusts?

This is often the crux question. Here’s the short answer: IHT can bite when assets move into, within, or out of the trust. Key points:

- On creation (transfer into trust): If you gift assets into a relevant property trust above your £325k nil-rate band (or the combined band if you're married), any amount over that gets a 20% IHT charge. (If the trustees pay, it’s 20%; if instead you as settlor pay, that’s akin to a normal IHT gift.) If you then die within 7 years, the estate “catches up” the remaining 20%, making the total 40%.

- 10-year anniversaries: Every decade after the trust is set up, trustees calculate the trust’s value and pay up to 6% IHT on the amount over the threshold. This only happens if the trust lasts that long. If trustees miss paying this, penalties can apply.

- Exit charges: When trust assets are distributed to beneficiaries or the trust ends, an exit charge (maximum 6%) can apply on the transferred portion. It’s a “proportionate” charge based on how long the assets were in trust.

- Special trusts: As noted, some trusts (for the disabled, minors, 18–25 trusts) are not “relevant property” and so avoid the 10-year and exit charges. This is an important planning tool – for example, a parent might use a bereaved minor’s trust to leave funds for a grandchild under 18, bypassing the usual charges.

- Residence/Cheating rule: Beware “gift with reservation.” If you transfer something into trust but keep benefitting (like living in your former house rent-free), HMRC treats it as still yours. That can bring the asset back into your estate and trigger IHT.

Practical tip: Always consider timing. If you think you’re likely to pass away within a few years, realize that your trust gifts could still be taxed as part of your estate. Conversely, if you survive more than 7 years, the lifetime IHT hit may be much lower.

“Inheritance Tax is due when assets are put into a trust, at the 10‑year anniversary of the trust, when assets leave the trust, or when someone dies with a trust involved.”

Can I use a trust for property or a family business?

Absolutely – trusts are often used in property and business succession planning:

- Property trusts: You can put homes or land into trust. This is common for holiday homes or second properties that you want to pass smoothly to children. For example, one of my building contractor clients put his rented cottage in trust for his sons. It keeps the cottage outside his estate (for probate/IHT purposes) and gives precise instructions on who lives there. Caution: Transferring your main residence triggers Capital Gains Tax considerations (usual principal private residence relief applies differently in trusts). Also, ensure you’re not living in it for free after gifting, or that could be a reservation of benefit trap.

- Business or share trusts: You might transfer company shares into trust to plan for the next generation or protect them. Family Investment Companies (FICs) are a popular alternative, but trusts still have a role. For example, a client who owned a family tech business set up an IIP trust for his wife (so she got the dividends) and a discretionary trust for the children’s education and grandchildren’s inheritance. Business Property Relief (BPR) can often cover business assets in trusts, making them exempt from IHT after 2 years.

- Protecting assets: If you worry about creditors, divorce, or a beneficiary’s problems, a discretionary trust adds a layer of protection: the assets are no longer legally yours (or the beneficiary’s) to be seized as easily. (This doesn’t hide assets illegally, of course – HMRC and courts look closely at transfers at undervalue or with deceptive intent.)

- Care fees planning: Sometimes people put a home into a trust before going into a care home, hoping the property won’t count for means-testing. The rules are tight: the local authority will look at when and why you did it. The Law Society warns a trust can be challenged if the main purpose was to avoid care costs. So I only recommend this with expert advice and genuine asset protection reasons.

Trusts are a powerful tool, but using them for property or business requires careful setup and tax planning. You’ll want clear deeds, valuation evidence, and probably an accountant on board (hello!) to handle the tax filings and ensure eligibility for reliefs like BPR or APR (Agricultural Property Relief) on farm land.

What are the “three certainties” again?

Just to recap: English law demands three certainties for an express trust. I’ll simplify:

- Certainty of intention: The settlor must clearly intend to create a trust. Look at words and context. Trust doesn’t need magic language, but it does need a legally binding direction. (If in doubt, say it explicitly.)

- Certainty of subject matter: It must be clear what is in the trust. If you say “some shares,” a court will ask “Which shares, and how many?”. Spell it out: “all my 1,000 shares of X plc” or “the cash in account #12345”.

- Certainty of objects: Must identify the beneficiaries (the “objects” of the trust). Even if you name a class (e.g. “my grandchildren”), the class must be defined so you can tell who qualifies.

If any is uncertain, the trust can fail. (I’ve seen a case where someone tried to put “some money” in trust for “old friends” – it didn’t work because the court couldn’t figure out who the friends were!) So always be specific.

What paperwork do I need?

- Trust deed or will clause: Typically a written document. We usually call it a trust deed (even if it’s part of a will). This should name settlor, trustees, beneficiaries, list assets (or class of assets), and spell out rules (e.g. trustees’ powers).

- Asset transfer documents: For example, land transfers, share transfers, etc. These should reflect the change of ownership. (For a cash trust, often the settlor just pays money into a trustee’s account, with the deed on file.)

- Trust registration: You’ll provide the trust name, date of deed, names of trustees, settlor, beneficiaries, and asset values to HMRC’s Trust Registration Service.

I always advise: treat it like forming a company or buying property – do it in writing and keep records. A proper deed keeps everyone clear. (Without it, trustees could be “volunteers,” meaning equity might not help if the transfer wasn’t completed.)

Can a trust be changed or ended later?

Trusts can be ended (“vested”) or varied, but it depends on how they’re set up. Many modern deeds include powers of “appointment” so trustees (often with beneficiary or settlor consent) can remove or add trustees, or even change beneficiaries, under the Variation of Trusts Act.

A trust will automatically end if its purpose is achieved (e.g. the child reaches age 18, or dies). For example, in a bare trust the beneficiary can demand the asset at 18, and the trust dissolves. Discretionary trusts typically have an “expiration age” (often 125 years per old law, now effectively 125 from creation or so under new rules) or end when trustees decide it’s time.

Ending a trust can have tax consequences (e.g. a distribution triggers exit charges). Trustees should seek advice before wrapping up a trust to ensure all tax is paid and paperwork is in order.

How do I register a trust?

As mentioned, most trusts must be registered with HMRC’s Trust Registration Service. The deadline is 90 days after creation or by 1 Sept 2022 for existing trusts (whichever is later). Practically every express trust in England & Wales (even ones with no tax due) had to register by that date, except a few exempt ones (small trusts, certain charitable trusts, etc.). With ~733,000 trusts on file by 2024, it’s now routine. Registration is done online, and you update it if trustees or beneficiaries change. Non-registration can mean fines, so put it on your checklist.

What happens if a trustee dies or can’t act?

Always name 2–4 trustees where possible. If a trustee dies or is incapacitated, the trust usually continues under the remaining trustees. If needed, a new trustee can be appointed (either by the deed’s provisions or by a court order).

Most deeds include a clause: “If Trustee A dies, Trustee B, C, etc continue; the settlor can appoint replacements…” This avoids interruption. Also, because a trust is a separate legal “entity,” the beneficiaries are unaffected by trustee changes.

What if I change my mind about the trust?

If you’re the settlor of a trust you created in life, you can usually revoke or alter it if the deed allows (e.g. “I reserve the right to revoke”). If it’s irrevocable (common), then you’d need all parties’ agreement and potentially a court order. For trusts in a will, you can update or revoke via a new will or codicil while alive.

Be cautious: once assets are transferred to an “irrevocable” trust, undoing that has IHT/gift implications (as above). Consultation is key.

How are trusts taxed differently from other assets?

In short, trusts often get less favorable tax treatment than individuals – that’s why planning is needed. We’ve covered the rates above, but here’s an actionable tip:

- Tax-efficient distributions: If a trust has income but only minor beneficiaries (who don’t pay tax), it often releases more money to them rather than letting the trustees pay 45%. Trustees can normally distribute income to beneficiaries before paying tax – the beneficiaries then handle the tax.

- Tax credits: If you’re the beneficiary of an interest trust (e.g. a life tenant), keep track of the tax already paid. You might reclaim allowances (like dividend or savings allowances) on your return.

- Annual exemptions: Don’t forget trusts have a small CGT and IHT annual allowance. For CGT, a trust had £1,500 in 2024/25. Every little bit helps.

We often build a cash buffer or spending plan into trusts so they don’t sit on huge taxable income. Or, in discretionary trusts, we might distribute most income out each year to avoid the 45% tax hit.

What if I die intestate (no will) but have a trust?

Normally, assets in a trust are governed by the trust deed, not by your will. If you had a trust set up in life, it will operate regardless of whether you have a will. If you meant to set up a will trust but then died intestate, the intestacy rules (or a court scheme) may indirectly create trusts (for example, minors’ share under Inheritance (Provision for Family and Dependants) Act). Always have a will if you’re setting up testamentary trusts!

Are there recent changes to trust law or tax I should know?

The UK trust tax landscape changes now and then:

- 2024 onwards: Discretionary trusts lost the 45% standard-rate band. Now all income in a discretionary trust is taxed at 45% or 39.35% (no first £1,000 at 20%). Also, the “no tax due” thresholds were adjusted (see Buzzacott Insight).

- Dormancy rules: Trusts without taxable income under £500 need not file a return (from 2024), simplifying filings for small trusts.

- Registration: Since September 2022 trust registration is mandatory (as discussed). Also be aware of anti-money-laundering compliance.

Tax law moves frequently. For instance, the Investec study underlying our intro stat assumed NRB freeze until 2026; in 2025 another freeze was confirmed, meaning many more estates will be taxable in coming years. Trusts are one way to mitigate that.

Practical tips and common pitfalls

1. Be crystal clear. Vague language is a trust’s enemy. Spell out names (or clear classes) and use explicit trust wording. For example, instead of “I give some money so and so will (hopefully) use it wisely,” say “I transfer £X to [Trustee] to hold on trust for [Beneficiary]”.

2. Don’t forget to fund the trust properly. If land is involved, register the transfer, pay SDLT, update deeds. If it’s a share trust, change share certificates. A trust isn’t effective if the assets aren’t actually moved.

3. Register early. When you set up a new trust, mark that 90-day deadline for TRS. Missing it can be an embarrassing fine.

4. Plan for the long term. Keep the trust’s purpose in mind. For instance, if a discretionary trust is meant for future generations, consider extending its duration (modern law allows up to 125 years) or refreshing the deed periodically.

5. Watch the 7-year rule. If you give a big gift into trust and are in poor health, realize your estate might face the full 40% if death is within 7 years. On the flip side, after 7 years it’s a “past gift” and free from your estate.

6. Keep records. Trustees should keep clear accounts of trust income, expenses, distributions, and valuations at crucial dates. This helps with annual trust tax returns and IHT calculations.

7. Communicate with trustees. If you’re appointing family members as trustees (common in family trusts), make sure they understand the workload: tax filings, banking, investment decisions, etc. They can (and often should) get professional help.

8. Review regularly. Trust law and tax rules change. What was set up 10 years ago might not be optimal now. At Cannon Accountants, we often revisit trusts to ensure they’re still fit-for-purpose and legally sound.

How do trusts help in England and beyond?

In short: trusts are just as valuable in England as anywhere else. Maybe you own a property by the coast or a family business in Folkestone; a trust can secure its future. For high-net-worth clients and family business owners, we routinely explain how a trust can save tax and keep wealth in the family. At Cannon Accountants (chartered certified accountants in Kent), we’ve guided many clients through this maze. If you’re thinking “I should do something about my estate,” or “my business succession plan needs structure,” give us a call. We’ll discuss whether a trust is right for you (sometimes a simpler solution like a will or company structure makes more sense). There’s no obligation, just a friendly chat with advisors who love solving these puzzles.

Bottom line: Trusts can be powerful, but only if done correctly. They can reduce taxes and ensure your assets benefit the people you choose. But they require clear intent and good admin. Hopefully these 20 questions have shed light on the essentials. If you’re ready to protect your legacy, please get in touch with Cannon Accountants in Kent – we’d love to help you turn your plans into action.

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Disclaimer: This blog post is for general information purposes only and does not constitute professional advice. Tax and trust planning are complex areas, and individual circumstances vary. Cannon Accountants accepts no responsibility for any action taken based on the information in this article. Please seek personalised advice before making any financial or legal decisions.