TL;DR
UK trusts hold assets for the benefit of others. They are widely used in estate planning to control how wealth passes, protect beneficiaries (including minors and vulnerable adults), and (in some cases) achieve IHT efficiency. Different trust types have different tax treatments under IHT, income tax, and CGT.
Key facts
- Bare trusts: beneficiary has immediate absolute right; treated as the beneficiary's assets for tax.
- Interest in possession trusts: beneficiary has a right to income, capital passes to others later.
- Discretionary trusts: trustees decide who benefits and how much.
- Most trusts created during the settlor's lifetime now fall within the relevant property regime (entry, periodic, and exit charges for IHT).
- Trusts must register with the HMRC Trust Registration Service (TRS), with limited exceptions.
What a trust is
A trust is a legal arrangement under which trustees hold assets for the benefit of beneficiaries. The settlor creates the trust and transfers assets to the trustees. The trustees have legal title; the beneficiaries have equitable interests defined by the trust deed.
Bare trusts
A bare trust gives the beneficiary an immediate and absolute right to both the capital and income. The trustees hold legally but the beneficiary is treated as the owner for tax purposes. Bare trusts are commonly used for minor children's savings, with the funds becoming directly accessible at 18.
Interest in possession trusts
An interest in possession trust gives a beneficiary the right to income from the trust assets (or to occupy a property) during their lifetime, with the capital passing to other beneficiaries later. Common in second marriages where the testator wants to provide for the new spouse while preserving capital for children of a previous relationship.
Discretionary trusts
A discretionary trust gives the trustees discretion over which of a named class of beneficiaries to benefit and by how much. Flexibility is the main advantage; the trustees can respond to changing circumstances among beneficiaries. Discretionary trusts are widely used for wealth held across generations.
The relevant property regime
Most trusts created during the settlor's lifetime (other than bare trusts and certain disabled person's trusts) fall within the relevant property regime for IHT:
Entry charge: lifetime transfers into a trust above the nil-rate band attract an immediate 20 percent IHT charge.
Periodic charge: every 10 years, a charge of up to 6 percent on the value of trust assets above the nil-rate band.
Exit charge: when assets leave the trust, a proportionate charge based on time since the last anniversary.
Tax on trust income and gains
Trust income is taxed at trust rates (currently 45 percent on most income above a small standard rate band, with dividends at 39.35 percent above a small allowance). Capital gains on trust assets are taxed at 24 percent on residential property and 24 percent on other assets from 30 October 2024 (with a reduced annual exempt amount of GBP 1,500 for most trusts).
Will trusts
Will trusts are created on death by the testator's will. They include: nil-rate band discretionary trusts (historically common, less so since transferable nil-rate bands), life interest trusts for a surviving spouse, and trusts for minor or vulnerable beneficiaries. Will trusts have their own tax regime that depends on the trust structure.
Trust Registration Service
Most UK trusts must register with the HMRC Trust Registration Service. The TRS was introduced under the EU Fifth Money Laundering Directive and continues post-Brexit. Limited exemptions apply to certain trust types (such as some bare trusts and pension trusts).
Costs of trust administration
Setting up a trust typically costs GBP 1,000 to GBP 5,000 in solicitor fees. Ongoing administration (accounts, tax returns, trustee meetings) typically costs GBP 1,000 to GBP 5,000 per year for a basic trust, more for complex trusts. Professional trustees charge additional fees.
The IHT regime: rates, bands, and reliefs
UK inheritance tax is charged at 40 percent on estates above the available nil-rate bands under the Inheritance Tax Act 1984. The standard nil-rate band is GBP 325,000 per individual, frozen until 2030 under successive Budget announcements. The residence nil-rate band (RNRB) of up to GBP 175,000 applies where a qualifying residential interest passes to direct descendants on death.
Both bands are transferable between spouses and civil partners. A married couple or civil partners can therefore shelter up to GBP 1 million on the second death where the home passes to direct descendants. The RNRB tapers above GBP 2 million of estate value, reducing by GBP 1 for every GBP 2 of estate over the threshold and being extinguished entirely for estates above GBP 2.35 million (or GBP 2.7 million in the transferable case).
Where at least 10 percent of the estate (after exemptions and the nil-rate band) is left to charity, the IHT rate on the rest of the estate falls to 36 percent from 40 percent. The reduced rate is intended to incentivise charitable legacy planning and has been used widely since its introduction in 2012.
Lifetime gifts and the 7-year rule
Gifts during lifetime above the annual exemptions are potentially exempt transfers (PETs) and fall outside the estate after 7 years. Gifts made between 3 and 7 years before death benefit from taper relief on any tax above the available nil-rate band: 20 percent reduction in IHT for gifts 3 to 4 years before death, rising to 80 percent reduction for gifts 6 to 7 years before death.
The annual exemptions cover smaller gifts without using the 7-year clock. Each individual has a GBP 3,000 annual exemption per tax year (which can be carried forward one year if unused). Small gifts up to GBP 250 per recipient per tax year are exempt. Wedding gifts are exempt: GBP 5,000 from each parent to a child marrying, GBP 2,500 from grandparents, GBP 1,000 from anyone else.
Gifts out of normal expenditure from surplus income are exempt without time limit if the donor establishes a regular pattern and retains a reasonable standard of living. The exemption is particularly useful for high earners with surplus income they wish to pass to family on a regular basis. Documentation establishing the regular pattern is essential for the exemption to apply in practice.
Business Property Relief and Agricultural Property Relief
Business Property Relief (BPR) reduces the IHT value of qualifying business assets by 50 or 100 percent. The 100 percent relief applies to interests in an unincorporated business, shares in an unquoted trading company, and shares in a quoted trading company where the deceased had control. The 50 percent relief applies to controlling shareholdings in quoted trading companies and certain other assets used in a business.
Agricultural Property Relief (APR) reduces the IHT value of agricultural property by 100 or 50 percent. The 100 percent relief generally applies to owner-occupied farmland; the 50 percent relief applies to tenanted farmland under certain conditions. The relief covers the agricultural value, not necessarily the full market value where development potential exists.
The Autumn Statement 2024 announced reforms to BPR and APR from April 2026, including a GBP 1 million combined cap on 100 percent BPR/APR. Above the cap, relief reduces to 50 percent. The reforms are being implemented through Finance Bill legislation and are expected to reshape estate planning for business owners and farmers significantly.
Wills, intestacy, and probate
A UK will must be in writing, signed by the testator, and witnessed by two adults present at the same time under section 9 of the Wills Act 1837. Beneficiary witnesses (or their spouses) invalidate the gift to the beneficiary under section 15, though the rest of the will stands. Marriage automatically revokes a prior will unless made in contemplation of the new marriage; divorce treats gifts to the former spouse as if they predeceased.
Intestacy rules under the Administration of Estates Act 1925 (as amended) follow a statutory hierarchy where there is no valid will: spouse and civil partner first with a statutory legacy of GBP 322,000 for deaths from 26 July 2023; then biological and adopted children sharing the residue; then more remote relatives. Step-children are not included in the intestacy hierarchy.
Probate is the process of obtaining authority to administer the estate. The executors named in the will apply to the Probate Registry; where there is no will, letters of administration are granted to the next-of-kin. The Probate Registry application fee is GBP 300 from January 2022 for estates above GBP 5,000. Solicitor probate fees typically run from 1 to 3 percent of estate value for full probate services.
Trusts in estate planning
UK trusts are widely used in estate planning. Bare trusts give the beneficiary an immediate absolute interest. Interest in possession trusts give a beneficiary a right to income with capital passing later. Discretionary trusts give trustees discretion over which beneficiaries to benefit and when. Most lifetime trusts (other than bare trusts and disabled persons trusts) fall within the relevant property regime: entry charges of up to 20 percent on creation, periodic 10-year charges of up to 6 percent, and proportionate exit charges.
Will trusts (created on death by the will) include life interest trusts giving a surviving spouse a right to occupy the family home with capital passing to children later, and discretionary trusts giving trustees flexibility over how the estate is distributed. Will trusts have their own tax treatment that depends on the structure.
The Trust Registration Service operated by HMRC under the EU Fifth Money Laundering Directive requires most UK trusts to register with HMRC. Beneficial ownership information is held on the register, accessible to law enforcement and certain other authorities. Limited exemptions apply for some trust types.
Disclaimer
This article provides general information on UK trusts and is not personal legal or tax advice. Trust structures are technical; specialist trust and estate advice is essential.
Frequently asked questions
Are trusts always tax-efficient?
No. Trusts within the relevant property regime can attract IHT entry, periodic, and exit charges. They are often used for control and family circumstances reasons, with tax efficiency as a secondary consideration.
What is the difference between a bare trust and a discretionary trust?
A bare trust gives the beneficiary an immediate absolute right. A discretionary trust leaves the trustees to decide which beneficiaries to benefit and how much.
Do all trusts have to register with HMRC?
Most do, under the Trust Registration Service. Limited exemptions apply.
Can a will create a trust?
Yes. Will trusts are created on death by the terms of the testator's will.
What is the periodic charge?
An IHT charge applied every 10 years to relevant property trusts, of up to 6 percent on the value of trust assets above the nil-rate band.
Frequently asked questions
Are trusts always tax-efficient?
No. Trusts within the relevant property regime can attract IHT entry, periodic, and exit charges.
What is the difference between a bare trust and a discretionary trust?
A bare trust gives the beneficiary an immediate absolute right. A discretionary trust leaves the trustees to decide.
Do all trusts have to register with HMRC?
Most do, under the Trust Registration Service. Limited exemptions apply.
Can a will create a trust?
Yes. Will trusts are created on death by the terms of the testator's will.
What is the periodic charge?
An IHT charge applied every 10 years to relevant property trusts, of up to 6 percent on the value above the nil-rate band.
