Trusts in plain English — UK 2026/27

What a trust actually is

A trust is a legal arrangement where one person (the settlor) gives assets to another person (the trustee) to hold for the benefit of a third (the beneficiary). The trustee owns the assets legally; the beneficiary owns them beneficially.

The key point: once assets are in a trust, they're not owned by the settlor anymore (with some specific exceptions). This is what makes trusts useful for:

• Removing assets from your estate for IHT purposes (gradually, with rules)
• Controlling when and how beneficiaries receive money (a child gets the fund at 25, not 18)
• Protecting assets from external risks (divorce, bankruptcy of beneficiary)
• Managing assets for someone who can't manage them themselves (minor children, disabled adults)
• Splitting income between family members for tax efficiency (less effective now than it was)

The three parties

Some trusts have multiple trustees (typically 2-4) and multiple beneficiaries. The settlor can sometimes also be a trustee, and rarely a beneficiary — though "settlor-interested" trusts have specific tax disadvantages.

The four main types of UK trusts

1. Bare trust (the simplest)

The beneficiary has an absolute right to the trust assets — they own them beneficially and can demand them whenever they want (subject to age, if a minor). The trustee just holds the assets in their name temporarily.

Tax treatment:

• The beneficiary is treated as owning the trust assets directly
• Income tax: paid at the beneficiary's marginal rate
• CGT: paid at the beneficiary's marginal rate, with their personal annual exempt amount
• IHT: no special trust IHT charges; the assets are in the beneficiary's estate

Common use cases:

• Holding investments for minor children (e.g. Junior ISAs, kid-named GIA holdings)
• Holding property in trust for someone who can't legally hold it (e.g. a minor inheriting a house)
• Simple "I'll hold this for you until you're 18" arrangements

Bare trusts are usually set up in a few hundred pounds of legal fees and have minimal ongoing complexity.

2. Life Interest Trust (Interest-In-Possession)

One beneficiary (the "life tenant") has the right to income from the trust during their lifetime. When they die, the capital passes to other beneficiaries (the "remaindermen") per the trust deed.

Classic use case: a husband leaves his estate in trust. His widow has the right to the income (or to live in the family home) for her lifetime. When she dies, the capital goes to the husband's children from a previous marriage. This balances providing for the second spouse while preserving capital for first-marriage children.

Tax treatment for trusts set up in a will (Immediate Post-Death Interest, IPDI):

• The life tenant is treated as owning the trust assets for IHT
• Income tax paid at the life tenant's rate
• CGT on disposals: trust pays at 20% (or 24% for property)
• On the life tenant's death: trust assets are in their estate for IHT

Tax treatment for trusts set up during life (post-2006):

• Treated as "relevant property" trust — the same IHT regime as discretionary trusts
• This made lifetime life interest trusts much less attractive after 2006

3. Discretionary Trust

The trustees have discretion over which beneficiaries receive income and capital, and when. No beneficiary has a fixed entitlement. Often the trust deed names a "class" of potential beneficiaries (e.g. "my children and grandchildren") and the trustees decide who gets what.

Why use one:

• Maximum flexibility for the trustees to respond to changing circumstances
• Protect assets from beneficiaries' creditors / spouses / divorce / bankruptcy — if no one has a fixed entitlement, the assets can't be claimed
• IHT planning — gifts into discretionary trust are "chargeable lifetime transfers" that fall outside the estate after 7 years (with some complications)
• Manage assets for vulnerable or unreliable beneficiaries who shouldn't have direct access

The IHT mechanic that scares people: the 10-year periodic charge:

• Every 10 years, the trust value (over the NRB of £325k) is charged IHT at 6%
• This is a relatively modest charge but it's a regular tax on accumulated trust capital
• For a trust worth £1m: every 10 years, IHT of approximately £40,500 (6% × £675k) is due
• Exit charges apply when capital leaves the trust (pro-rated based on time since last 10-year charge)

The 6% / 10-year charge sounds painful but compare it to 40% IHT on the estate — for assets you want to keep out of the estate AND control for multiple generations, the trust IHT charges can be lower than estate IHT.

4. Accumulation & Maintenance Trust / Bereaved Minors Trust

Specialist trusts for minor children. Once the dominant child trust type pre-2006; replaced by 18-25 trusts and Bereaved Minors Trusts after the 2006 reforms.

Bereaved Minors Trust:

• Set up via a parent's will for their child under 18
• Income may be used for the child's maintenance; capital must be paid out at age 18
• Treated as the child's asset for IHT (no relevant-property charges)
• Income tax at the child's rate (with parental settlement anti-avoidance rules if you put it in)

18-25 Trust:

• Similar but assets are paid out at age 25 instead of 18
• The 7-year period between 18 and 25 has slightly different IHT treatment (an exit charge applies on capital paid out before 25)

Standard advice: if you want children to inherit at 18 only, no special trust needed. If you want delay to 21, 25 or 30, an 18-25 trust or a discretionary trust within the will is the structure.

UK trust tax rates 2026/27

Critical observation: trust income tax rates (45%) are significantly higher than personal rates. This is why trustees often distribute income to beneficiaries quickly — the beneficiary pays at their lower rate, and the trust reclaims the difference via tax credits.

When trusts make sense for UK retail

Life insurance held in trust

Almost universally a good idea for life insurance worth more than ~£25,000. Removes the policy proceeds from your estate for IHT (potentially saving 40% of the payout). See our life insurance in trust guide.

Protecting inheritance from minor / vulnerable children

If your child is too young, has a disability, has substance abuse issues, or is in a precarious marriage, a discretionary trust within your will protects their inheritance from being mismanaged or claimed by external parties. The trustees can use discretion to pay for their needs without giving them direct access.

Blended families

A life interest trust in your will lets you provide for a second spouse during their lifetime while ensuring capital eventually passes to your first-marriage children. Avoids the common scenario where a surviving second spouse rewrites their will to favour their own children, disinheriting yours.

Substantial IHT planning

For estates likely to face significant IHT, gifting into a discretionary trust uses your NRB (£325k every 7 years can be put in tax-free) and removes future growth from your estate. Combined with other IHT strategies, a meaningful IHT reduction is achievable over 10-20 years.

Business continuity

Family business shares can be held in trust to preserve control across generations and protect against fragmentation. Often combined with