What is a Trust? UK Guide to Trusts Explained Simply

Trusts sound complicated and old-fashioned, but they're actually practical tools that solve real problems for ordinary families. At their core, trusts are simply a way of holding assets for someone's benefit – whether that's protecting an inheritance, providing for a vulnerable family member, or managing how and when money passes to the next generation.

I'll explain trusts in plain English, show you when they're genuinely useful, and help you understand whether you might need one.

Trust Basics: What is a Trust?

A trust is a legal arrangement where one person (the trustee) holds and manages assets for the benefit of another person (the beneficiary). The person who creates the trust and puts assets into it is called the settlor.

Think of it like this: instead of giving someone a gift directly, you give it to a trusted third party to look after and give to them according to your instructions.

The three key parties:

• Settlor: The person who creates the trust and puts assets into it
• Trustee: The person (or people) who manage the trust assets
• Beneficiary: The person (or people) who benefit from the trust

Sometimes the same person can have multiple roles. For example, a parent might set up a trust for their children where they are both the settlor and one of the trustees.

How Do Trusts Work?

When you create a trust, you transfer ownership of assets to the trustees. The trustees then hold those assets and manage them according to the trust's rules (called the trust deed).

The trust deed sets out:

• Who the beneficiaries are
• What the trustees can and can't do
• How and when beneficiaries receive benefits
• What happens in various circumstances

Trusts can be set up during your lifetime (lifetime trusts) or created by your will (will trusts). They can last for a fixed period, until certain conditions are met, or until all assets have been distributed.

Types of Trusts

Bare Trusts

The simplest type of trust. The beneficiary has an absolute right to the assets and any income they generate. The trustee simply holds the assets until the beneficiary wants them.

Common uses:

• Holding assets for children until they turn 18
• Junior ISAs and child trust funds
• Simple gifts where you want someone else to manage the assets temporarily

Tax treatment: The beneficiary is treated as owning the assets directly. Any income or gains are theirs for tax purposes.

Interest in Possession Trusts

A beneficiary has the right to income from the trust (or to use trust assets, like living in a property), but not to the capital itself. When their interest ends, the capital passes to someone else.

Common uses:

• Life interest trusts in wills – spouse can use assets for life, then they pass to children
• Protecting a share of the family home while letting a spouse continue living there
• Providing income for one person while preserving capital for others

Example: John's will puts the family home in trust. His wife Mary can live there for the rest of her life (her "interest"). When Mary dies, the property passes to their children (the "remaindermen").

Discretionary Trusts

No beneficiary has a fixed entitlement. The trustees have discretion over who receives what and when, from a class of potential beneficiaries. This gives maximum flexibility.

Common uses:

• Providing for a family where circumstances might change
• Protecting assets from a beneficiary's poor decisions or creditors
• Supporting a vulnerable beneficiary without them owning assets directly
• Tax-efficient distributions across family members

Example: A grandmother creates a discretionary trust for her grandchildren. The trustees can pay for education, housing deposits, or other needs as they arise, rather than giving each grandchild a fixed sum at a fixed age.

When Might You Need a Trust?

Trusts aren't just for tax planning or wealthy families. Here are common situations where trusts help ordinary people:

Protecting children's inheritance:

If you leave assets directly to children, they get full control at 18. Many parents prefer assets to be held in trust until children are older and more financially mature.

Blended families:

A life interest trust can ensure your spouse is provided for while guaranteeing your children ultimately inherit your share of assets.

Vulnerable beneficiaries:

If a beneficiary has a disability, addiction, or is simply bad with money, a trust can provide for them without giving them direct control of assets.

Protecting assets from care home fees:

While trusts can't be used to deliberately deprive yourself of assets to avoid care fees, certain trusts set up genuinely and early enough can provide some protection.

Protecting assets from divorce:

Assets held in trust may be better protected if a beneficiary later divorces (though courts have wide powers to look through trusts).

Life insurance:

Putting life insurance in trust means the payout doesn't form part of your estate for inheritance tax, and can be paid out quickly without waiting for probate.

How Much Do Trusts Cost?

Setting up a trust:

• Simple will trust (as part of a will): £300-600 additional to will cost
• Lifetime trust (standalone): £500-2,000
• Complex trust arrangements: £1,500-5,000+

Ongoing costs:

• Trustee fees (if using professionals): 0.5-1.5% of trust value per year
• Trust tax returns: £200-500 per year
• Trust accounts/administration: Variable

Some trusts (like simple life insurance trusts) have minimal ongoing costs. Complex discretionary trusts with active management can be expensive to run.

How Are Trusts Taxed?

Trust taxation is complex and depends on the type of trust:

Income tax:

• Bare trusts: Taxed as beneficiary's income
• Interest in possession: Income taxed at basic rate in trust, with top-up if beneficiary is higher/additional rate
• Discretionary: 45% on income (but can reclaim if beneficiary is basic rate taxpayer)

Capital gains tax:

• Trusts have a reduced annual exemption (currently £1,500)
• Rate is 24% on residential property, 20% on other assets

Inheritance tax:

• Transfers into most trusts are immediately taxable if above nil-rate band
• Discretionary trusts face periodic charges (every 10 years) and exit charges
• Will trusts have specific rules depending on type

The tax implications of trusts are significant. Always get professional advice before setting one up.

Common Misconceptions

"Trusts avoid inheritance tax"

Not automatically. Trusts have their own IHT rules and putting assets in trust can actually accelerate tax charges in some cases. Trusts can be part of IHT planning, but they're not a simple tax dodge.

"Trusts protect assets from care home fees"

If you transfer assets to avoid care fees, the local authority can treat you as still owning them (deliberate deprivation of assets). Trusts only provide protection if set up genuinely, long before care is needed, and not primarily to avoid fees.

"Trusts are only for the rich"

Many trusts are used by ordinary families. A simple life insurance trust costs nothing to set up and can save thousands in inheritance tax and probate delays.

"I can put my house in trust and still live in it"

This is a "gift with reservation" and doesn't work for IHT purposes. You'd still be treated as owning the property. There are legitimate planning techniques, but this isn't one of them.

Trusts are powerful tools when used correctly, but they're not magic solutions. They have costs, tax implications, and limitations. The best approach is to discuss your specific situation with a professional who can advise whether a trust is genuinely the right solution for you.