Trusts explained: types of trust, tax and trustees' duties

What a trust is

A trust is an arrangement for holding assets, such as money, investments, land or buildings, for the benefit of other people. The settlor is the person who puts assets into the trust, the trustees become the legal owners of the assets and manage them, and the beneficiaries are the people the trust is for, who may be entitled to the income, the capital or both, or who may receive payments when the trustees decide.

The terms of the trust, usually set out in a trust deed or in a will, say who can benefit, when and how, and what powers the trustees have. A trust can continue when trustees change, but there must always be at least one trustee. Some trusts arise without anyone setting them up deliberately. When someone dies without a will leaving children under 18, for example, the children's inheritance is held on trust for them until they are 18.

Why people use trusts

A trust lets you decide how and when someone benefits from assets, instead of handing the assets over outright.

Young children cannot manage money, so a will often leaves their inheritance on trust, with trustees using it for their upkeep and education and passing it to them at an age the parent chooses. A trust can provide for someone who cannot manage their own affairs because of illness or disability, with the trustees looking after the money for them. A trust can also keep family business shares together, with trustees holding them, rather than dividing the shares between several beneficiaries.

In second marriages and blended families, trusts are often used to provide for a surviving spouse while protecting children from an earlier relationship. For example, say a man in a second marriage wants his wife to be able to stay in their home for the rest of her life, and wants his share of the house to go to his children from his first marriage after that. A trust in his will giving his wife the right to live in the home for life, with the capital passing to his children when she dies, achieves that.

A lifetime gift into a trust can also help with inheritance tax, because it can fall outside your estate if you survive for seven years and do not keep benefiting from it. Most trusts, though, have their own inheritance tax charges, income tax rates and reporting duties, so the tax effect needs to be worked out for your circumstances before you commit.

The main types of trust

Bare trusts

The trustees hold the assets in their names, but the beneficiary is entitled to the capital and income outright and, in England and Wales, can take them at 18. Bare trusts are often used to hold assets for young people. The beneficiary is responsible for tax on the income, and for inheritance tax a lifetime gift into a bare trust is treated like an outright gift, which falls outside the giver's estate if they survive seven years.

Interest in possession trusts

One beneficiary is entitled to the income from the trust as it arises, or to use an asset such as a house, usually for life, and when that interest ends the capital passes to other beneficiaries. This is the structure used in the second marriage example above. Where the trust is created by a will and the interest starts on the death, the trust assets are treated for inheritance tax as part of that beneficiary's estate when they die, and the trust is not subject to the ten-yearly charge described below.

Discretionary and accumulation trusts

The trustees decide which of a group of beneficiaries receives income or capital, how much and when, within the terms of the trust. An accumulation trust also allows income to be kept and added to the capital. Discretionary trusts suit situations where needs are uncertain, such as grandchildren of different ages, a beneficiary who may later need more help than others, or someone who should not have money paid to them directly. They are within the relevant property rules, so the ten-year and exit charges apply.

Trusts with special tax treatment

Some trusts are treated more favourably. Qualifying trusts for a disabled person, trusts for a bereaved minor that give the child everything by 18, and 18 to 25 trusts for a young person who has lost a parent are not subject to the ten-yearly inheritance tax charge. Trusts for vulnerable beneficiaries can also elect for special income tax and capital gains tax treatment. A settlor-interested trust, where the settlor or their spouse or civil partner can benefit, has its own rules, and the settlor is responsible for the income tax.

Setting up a trust in your lifetime or in your will

A lifetime trust is created by a trust deed, and the assets are transferred into the names of the trustees. A will trust takes effect on your death, when your executors pass assets to the trustees named in your will. A will trust costs nothing to run while you are alive and can be changed whenever you change your will, but it does nothing to reduce your estate during your lifetime. A lifetime trust moves assets out of your hands now, which can reduce the value of your estate over time, but you give up control of those assets and usually cannot take them back.

Choose trustees carefully. They need to be trustworthy, capable of making financial decisions and willing to serve for what may be many years. Consider appointing at least two, so that decisions are not left to one person, and consider including someone with professional experience where the trust will hold significant or complex assets. You can give the trustees a letter of wishes explaining how you would like them to use their discretion. It is not binding, but trustees take it into account.

Putting assets into a trust can have tax consequences at the start. Transferring an asset that has gone up in value can create a capital gains tax charge, although relief to postpone the tax may be available in some cases. If you put assets into a trust and continue to benefit from them, for example by carrying on living in a house you have transferred to the trust, the gift is treated as a gift with reservation of benefit, and the assets still count as part of your estate for inheritance tax. Most express trusts must also be registered with HMRC, as explained below.

How inheritance tax applies to trusts

Most trusts are taxed under a set of rules that charge inheritance tax when assets go into the trust, every ten years while the trust lasts, and when assets leave it. These are known as the relevant property rules. They apply to discretionary and accumulation trusts, and to most interest in possession trusts set up during someone's lifetime on or after 22 March 2006.

The first charge applies when assets go in. A lifetime gift into the trust is a chargeable transfer, and inheritance tax is charged at 20% on the amount by which the gift, added to any other chargeable gifts you made in the previous seven years, exceeds the £325,000 nil-rate band. If you die within seven years, the tax on the gift is worked out again at the rates that apply on death, with credit for the tax already paid.

For example, say someone who has made no other chargeable gifts in the last seven years puts £425,000 into a discretionary trust, and the trustees pay the tax. Leaving annual exemptions aside, the first £325,000 is within the nil-rate band and the remaining £100,000 is taxed at 20%, so the tax is £20,000.

The second charge arises on each tenth anniversary of the trust's creation, when tax can be charged on the value of the relevant property in the trust, after deducting any business or agricultural relief. The rate is worked out by reference to the nil-rate band and the settlor's earlier chargeable gifts, and it cannot be more than 6%, which is three-tenths of the 20% lifetime rate.

The third is the exit charge, which applies when property leaves the trust, for example when the trustees pay capital to a beneficiary or the trust comes to an end. The exit charge is also no more than 6%, and there is no exit charge on property that leaves in the first three months after the trust is set up or in the three months after a ten-year anniversary.

Business and agricultural property held in trust is affected by the April 2026 changes. Since 6 April 2026, 100% relief on qualifying business and agricultural property in a trust has been limited by a £2.5 million allowance, with 50% relief above that. Trusts that a settlor creates on or after 30 October 2024 share a single £2.5 million limit, while a trust created before that date that already held qualifying property has its own allowance. The changes were made by Schedule 12 to the Finance Act 2026, and our guide to inheritance tax for business owners explains the wider rules.

Income tax and capital gains tax on trusts

Most trusts pay no income tax if their income is no more than a tax-free amount, normally £500, but once income is above that amount, tax is due on all of it. Trustees of discretionary and accumulation trusts pay income tax at 45%, or 39.35% on dividends, and where a settlor has created more than one such trust the tax-free amount is shared between them, down to £100 each where there are five or more. Trustees of interest in possession trusts pay 20% on most income and 10.75% on dividends, the dividend rate since 6 April 2026. Income from a bare trust is taxed as the beneficiary's, and income from a settlor-interested trust is the settlor's responsibility.

When trustees sell or give away assets that have gone up in value, capital gains tax may be due on the gain above the trust's annual exempt amount, which for 2026 to 2027 is £1,500, or £3,000 where a beneficiary is vulnerable. Trustees report income and gains on a Trust and Estate Tax Return, and tax on the sale of a UK residential property must be reported and paid within 60 days of completion.

Registering a trust with HMRC

HMRC's Trust Registration Service is a register of trusts kept under the anti-money laundering rules. A UK trust must be registered if it is liable to income tax, capital gains tax, inheritance tax or stamp duty land tax, or the equivalent land taxes in Wales and Scotland. Most UK express trusts, meaning trusts deliberately set up by a settlor, must also be registered even if they have no tax to pay.

Some trusts are excluded unless they are liable to tax. They include a will trust that takes assets from the estate and is closed within two years of the death, a trust holding life insurance policies that pay out only on death, illness or disability, a trust holding the assets of a registered pension scheme, a charitable trust, a trust set up to open a bank account for a child, and a co-ownership trust for property held as tenants in common. A small trust can also be excluded if it holds no UK land, has assets worth no more than £2,000, has never held property worth more than £10,000 in total, has income of no more than £5,000 a year and has no UK tax liability, but that exclusion applies to only one trust per settlor.

A trust with no tax liability that was created after 6 October 2020 must be registered within 90 days of being created. A taxable trust created on or after 6 April 2021 must be registered within 90 days of becoming liable to tax. Once a trust is registered, changes to its details, such as a new trustee or a change of address, must be updated within 90 days. HMRC says a failure to register can lead to a £5,000 penalty.

What trustees have to do

Trustees are the legal owners of the trust assets and are responsible for them. Their basic duty is to follow the terms of the trust and act in the interests of the beneficiaries, treating them fairly, and not to use their position for their own benefit unless the trust allows it.

Under section 1 of the Trustee Act 2000, a trustee must use the care and skill that is reasonable in the circumstances, and more is expected of a professional trustee, or of someone who claims particular knowledge or experience. When investing, trustees must consider whether investments are suitable for the trust and whether the trust's investments need to be diversified, review the investments from time to time, and take proper advice unless they reasonably conclude that it is unnecessary.

In practice that means keeping trust money and assets separate from your own, keeping accurate records and accounts, making decisions together with your fellow trustees and recording them, filing tax returns and paying any tax, keeping the Trust Registration Service entry up to date, and giving beneficiaries appropriate information. A trustee who breaches the trust can be personally liable to make good any loss, so take advice before a significant decision, such as a large payment out of the trust, a sale of property or a change in how the trust is invested.

Deciding whether a trust is right for you

A trust is worth considering where there is a specific reason for it: children under 18, a beneficiary who cannot manage money, a second marriage or blended family, business interests that should be kept together, or a wish to give assets away during your lifetime while keeping some control over who ultimately benefits. For a straightforward estate passing to adults outright, a will without a trust may do everything you need.

Before deciding, think about what you want to achieve and for whom, what the trust would hold, who would act as trustees, how long it needs to last, and what it will cost to run, including tax returns, registration and professional fees. Check the tax effect of a lifetime trust with your accountant or financial adviser before any assets are transferred.

We draft trust deeds and trusts in wills, advise trustees on their powers and duties, and deal with registration and with appointing or replacing trustees. We agree the scope of the work and the cost with you in writing before we start.

Frequently asked questions

What is the difference between a bare trust and a discretionary trust?

In a bare trust the beneficiary is entitled to the assets and income outright and can take them at 18 in England and Wales, so the trustees simply hold them until then. In a discretionary trust the trustees decide which beneficiaries receive income or capital, how much and when. The tax treatment differs too: a lifetime gift into a bare trust is treated like an outright gift, while a discretionary trust is subject to the ten-year and exit charges.

Do I need to register a trust with HMRC?

Yes, if it is an express trust that is not excluded, or if it is liable to UK tax. Most UK express trusts must be registered on the Trust Registration Service even if they have no tax to pay. Exclusions include will trusts closed within two years of the death, trusts holding life policies that pay out only on death, illness or disability, and some very small trusts. A non-taxable trust created after 6 October 2020 must be registered within 90 days of being created.

What is the ten-year charge on a trust?

It is an inheritance tax charge on trusts within the relevant property rules, such as discretionary trusts, on each tenth anniversary of the trust being created. The rate is worked out by reference to the value of the trust property, the nil-rate band and the settlor's earlier chargeable gifts, and it cannot be more than 6%. Business and agricultural relief can reduce the value charged, and qualifying trusts for disabled people and bereaved minors are not subject to it.

Can I benefit from a trust I set up myself?

You can, but it changes the tax treatment. A trust from which you, your spouse or your civil partner can benefit is a settlor-interested trust, and you are responsible for the income tax on its income. For inheritance tax, if you give assets to a trust and keep benefiting from them, the gift is treated as a gift with reservation of benefit and the assets still count as part of your estate, so the gift does not reduce the value of your estate.

Does a trust in a will need to be registered?

Not if it takes assets from the estate and is closed within two years of the death, unless it becomes liable to UK tax. A will trust that continues for longer, such as one holding money for young children or giving a surviving spouse a life interest, will usually need to be registered on the Trust Registration Service, and any later changes to its details must be updated within 90 days.

Will putting assets into a trust avoid inheritance tax?

Not automatically. A lifetime gift into most trusts is charged at 20% on the amount above the available nil-rate band, and if you die within seven years the tax is worked out again at the rates that apply on death. The trust may then pay charges of up to 6% every ten years and when property leaves it, and if you keep benefiting from the assets they stay in your estate. Whether a trust reduces inheritance tax depends on the details.

Are trusts only for wealthy families?

No. Trusts are used for practical family reasons, such as holding an inheritance for children under 18, providing for a relative who cannot manage money, or making sure children from a first marriage eventually inherit. Some trusts arise without being deliberately set up, for example when someone dies without a will leaving children under 18. The cost of running a trust should be weighed against what it achieves.

Sources & further reading

• GOV.UK — Trusts and taxes
• GOV.UK — Trusts and Inheritance Tax
• GOV.UK — Check if you need to register a trust
• GOV.UK — Manage your trust's details
• legislation.gov.uk — Trustee Act 2000, section 1
• legislation.gov.uk — Inheritance Tax Act 1984, section 66
• legislation.gov.uk — Finance Act 2026, Schedule 12

This article is general information, not legal advice. The law changes and depends on your circumstances — always take advice on your specific situation before acting. Last reviewed 17 September 2026. AD Solicitors is a trading name of AD Solicitors Limited, a recognised body regulated by the SRA (no. 8011228).