01

Bare trusts — simple, tax-transparent and ideal for children's savings

A bare trust is the simplest trust structure. The beneficiary has an immediate and absolute right to the assets and all income from them — the trustee holds the assets in name only, with no discretion over distributions. For inheritance tax purposes, a gift into a bare trust is a potentially exempt transfer (PET) — if the donor survives seven years, the full gift falls outside the estate with no periodic or exit charges.

The primary use case: savings and investments held for children or grandchildren. A grandparent who opens a bare trust investment account for a grandchild makes a PET of the contributed amount. If the grandparent survives seven years, the asset and all accumulated growth is outside the estate permanently. The child gains legal control of the assets at age 18.

Income tax treatment of bare trusts is straightforward but with an important distinction based on who funded the trust. If a parent funds a bare trust for their minor child, the parental settlement rules (ITTOIA 2005, s629) attribute all income from the trust back to the parent — eliminating the income tax advantage. Income from grandparent-funded bare trusts, or from trusts funded by anyone other than a parent, is assessed on the child at the child's marginal rate (typically zero if the child has no other income, up to the basic rate band).

The Junior ISA offers many of the same benefits as a bare trust for children's savings — tax-free growth and income, annual contributions of up to £9,000 per year — without the legal complexity. For straightforward savings gifts to children, the JISA should be considered before a bare trust.

02

Discretionary trusts — the most flexible but most taxed structure

A discretionary trust gives trustees the power to decide which beneficiaries receive income and capital, when, and in what amounts. No beneficiary has a fixed entitlement — the trustees exercise discretion within the terms of the trust deed. This flexibility is the discretionary trust's greatest asset: it allows the settlor to set up a structure that can adapt to beneficiaries' changing circumstances over decades.

The IHT treatment of discretionary trusts has been significantly less favourable since the Finance Act 2006. Gifts into discretionary trusts are immediately chargeable transfers (ICTs) — not PETs. If the gift exceeds the available nil rate band (£325,000 per individual), the excess attracts an immediate 20% IHT entry charge. A couple can combine both nil rate bands to make gifts of up to £650,000 before the entry charge applies — but this requires both to have fully available nil rate bands.

Periodic charge: every tenth anniversary of the trust, HMRC charges up to 6% of the trust value above the nil rate band. A discretionary trust with £500,000 of assets and a full £325,000 nil rate band available: periodic charge = 6% × (£500,000 - £325,000) = 6% × £175,000 = £10,500. This is paid by the trust from trust assets.

Exit charge: when assets leave the trust — whether distributed to beneficiaries or appointed out — an exit charge applies, calculated as a fraction of the periodic charge rate based on how long the assets have been in the trust. The combined effect of periodic and exit charges is significant but manageable — and for estates facing 40% IHT on death, paying 6% every 10 years within a trust is materially more efficient.

03

Loan trusts — keeping access to capital while removing growth from the estate

A loan trust is a hybrid arrangement that addresses the most common objection to trust planning: the reluctance to give up access to assets. The settlor lends money to a discretionary trust — typically on interest-free terms — and retains the right to demand repayment of the loan at any time. The outstanding loan is an asset of the settlor's estate. But any investment growth on the loaned funds within the trust accumulates outside the estate — permanently.

The mechanics: the settlor lends £300,000 to the trust. The trust invests the funds. After 15 years at 6% net annual growth, the trust holds approximately £718,000. The settlor can demand repayment of the £300,000 loan at any time — this remains in the estate. The £418,000 of growth sits inside the trust, outside the estate, permanently. No seven-year survival period applies to the growth because the initial transaction was a loan, not a gift.

IHT treatment: the loan itself is always an asset of the estate (it appears as a debtor). The growth is never in the estate because it belongs to the trust from the moment it arises. There is no PET and no ICT — the loan transaction is not a gift for IHT purposes.

The interest-free loan creates a benefit in kind for the trust — HMRC charges notional interest at the official rate (2.25% in 2026/27) as income of the trust. This is a minor cost relative to the IHT saving on accumulated growth. Some loan trust structures use a commercial interest rate to eliminate this charge.

04

Interest in possession trusts — the old regime versus the new

An interest in possession (IIP) trust gives one beneficiary (the life tenant) the right to all income from the trust assets for a defined period — typically for life. On the life tenant's death (or the end of the income period), the capital passes to the remainder beneficiaries. A classic example: a widow is entitled to all income from a trust fund for life, with capital passing to the children on her death.

Pre-2006 IIP trusts created before 22 March 2006 generally benefit from the old regime: the life tenant is treated as beneficially owning the trust assets for IHT purposes, and the trust does not face periodic or exit charges. The life tenant's estate includes the trust fund value on death.

Post-2006 IIP trusts (created on or after 22 March 2006) are treated as relevant property trusts subject to the periodic and exit charge regime — the same as discretionary trusts. The exception is immediate post-death interest (IPDI) trusts: IIP trusts created under a will or intestacy on death are exempt from the relevant property regime even if created after 2006.

The IPDI exception makes IIP trusts created under a will a valuable planning tool. A will that creates an IIP trust for a surviving spouse — giving the spouse income for life with capital passing to children on second death — achieves the spousal exemption on first death (assets pass to spouse as life tenant, exempt from IHT) while ensuring the capital passes to children on second death and is not treated as part of the surviving spouse's estate for IHT purposes. This can preserve the RNRB for the children while providing the surviving spouse with income.

05

Trust registration and compliance — the TRS obligations every trustee must know

Since October 2020, all UK express trusts (trusts deliberately created, as opposed to arising by operation of law) must be registered with HMRC's Trust Registration Service (TRS) unless a specific exemption applies. The registration deadline for trusts in existence before September 2022 passed on 1 September 2022. New trusts must register within 90 days of creation.

The exemptions from TRS registration include: trusts holding only cash in a single bank account below £100, bare trusts holding only standard financial assets for a named beneficiary, co-ownership arrangements, and certain charitable trusts. These exemptions are narrow — take legal advice before assuming a trust is exempt.

The ongoing TRS obligations: registered trusts must update their registration within 90 days of any change in beneficial ownership, trustee appointments or trust assets. Annual updates are required for taxable trusts (those with tax liabilities). Trustees who fail to register or update face penalties of up to £5,000 per offence — but HMRC has indicated a gradual enforcement approach for first-time failures.

Beyond TRS, ongoing trust compliance includes: annual trust tax returns (SA900) if the trust has any income or gains; trustee accounts (typically prepared by an accountant); and periodic review of the trust deed and letter of wishes with a solicitor. Annual professional costs for a discretionary trust with active investments: approximately £2,000 to £4,000, including accountancy and legal review.