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By Money Saving AdvisorsThe main types of trusts in the UK are discretionary trusts, bare trusts, interest in possession trusts, will trusts, and life insurance trusts. Each serves a different purpose and has different tax implications. Discretionary trusts give trustees flexibility over how and when to distribute assets. Bare trusts give the beneficiary an absolute right to the assets at age 18. Interest in possession trusts provide income to one beneficiary while preserving capital for another.
Will trusts are created within a will and only take effect after death, making them the most common type for families. Life insurance trusts hold an insurance policy outside the estate, avoiding inheritance tax on the payout. The right type depends on your goals: asset protection for children, providing for a spouse while preserving capital, reducing inheritance tax, or protecting assets from care home fee assessments. Setup costs range from free (life insurance trusts) to £5,000 or more for complex standalone trusts.
Sources: GOV.UK Trusts and taxes, HMRC Trust Registration Service, The Law Society
| Type | How it works | Best for | Setup cost | Tax treatment |
|---|---|---|---|---|
| Discretionary trust | Trustees have full discretion over how and when to distribute assets among a class of beneficiaries. No single beneficiary has a fixed entitlement. | Protecting assets for children, flexible family planning, shielding assets from divorce or debt. | £1,000 to £3,000 | 20% entry charge on assets over £325,000. Up to 6% periodic charge every 10 years. Income taxed at 45%. |
| Bare trust | Beneficiary has absolute right to trust assets and income. Trustees hold assets as nominees only, with no discretion. | Simple gifts to children or grandchildren. Tax-efficient for small amounts. | £500 to £1,000 | Taxed as beneficiary's income. No entry or periodic charges. Beneficiary gains full control at 18. |
| Interest in possession trust | One beneficiary (life tenant) receives all income from the trust. On their death, capital passes to the remainderman. | Providing for a surviving spouse while preserving capital for children from a previous relationship. | £1,000 to £2,500 | Income taxed at life tenant's rate. Capital may be included in life tenant's estate for IHT. |
| Will trust | Created within a will and activated on the settlor's death. Can be discretionary or interest in possession. | Controlling when children receive inheritance. Protecting assets from remarriage or care fees. | £500 to £1,500 (as part of will) | Depends on trust type. No lifetime entry charge as trust starts on death. |
| Life insurance trust | Life insurance policy held in trust so proceeds bypass the estate entirely. | Ensuring life insurance avoids inheritance tax and probate delays. | Usually free (arranged through insurer) | Payout outside the estate for IHT. No income tax on lump sum payout. |
| Accumulation trust | Trustees can add income to the capital rather than distributing it. Grows the trust fund over time. | Building a fund for a future purpose, such as education or a property deposit. | £1,000 to £3,000 | Income taxed at 45%. Same entry and periodic charges as discretionary trusts. |
A discretionary will trust is usually the best option. It protects the inheritance until your children reach an age you consider appropriate (not just 18), and trustees can release funds gradually. If your children face financial difficulties, divorce, or bankruptcy, the assets in a discretionary trust are generally protected because no individual beneficiary has a fixed entitlement.
An interest in possession trust within your will lets your surviving spouse live in the family home and receive income from the trust for life. On their death, the capital passes to your children. This is particularly important in blended families where you want to ensure children from a previous relationship inherit.
A discretionary lifetime trust can remove assets from your estate for inheritance tax purposes, but you must survive 7 years after transferring assets. A life insurance trust is simpler and more effective for many families: the policy payout goes directly to beneficiaries outside your estate, with no 7-year wait and usually no setup cost.
A bare trust is the simplest option for smaller amounts. The grandchild gains full control at 18. For larger amounts or if you want to control when they receive the money, a discretionary trust gives the trustees power to release funds at their discretion.
Be cautious. Transferring your home into a trust specifically to avoid care fees can be treated as a deliberate deprivation of assets by the local authority. A trust set up well in advance and for genuine family reasons (not care fee avoidance) may offer some protection, but professional advice is essential.
Trust taxation varies significantly between types. Understanding the tax position before setting up a trust can save thousands.
Discretionary and accumulation trusts face a 20% immediate charge on assets transferred above the £325,000 nil-rate band. Bare trusts and interest in possession trusts do not face an entry charge, but the transfer may count as a potentially exempt transfer for inheritance tax purposes.
Discretionary and accumulation trusts face a charge of up to 6% of the trust value every 10 years. This is calculated based on the trust value above the nil-rate band. Bare trusts and interest in possession trusts are not subject to periodic charges.
Discretionary and accumulation trusts pay income tax at 45% on income above £500. Bare trust income is taxed as the beneficiary's income (often at 0% or 20% if the beneficiary is a child with no other income). Interest in possession trust income is taxed at the life tenant's marginal rate.
All trusts pay capital gains tax at 24% on gains above the annual exempt amount (£1,500 for trusts, half the personal allowance). Bare trusts are an exception: gains are taxed as the beneficiary's gains at their personal rate.
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