The Main Types of Trust for Estate Planning

A trust is a legal arrangement where one set of people, the trustees, hold and manage assets for the benefit of others, the beneficiaries, according to rules set by the person who created the trust, the settlor. In estate planning, trusts are used to control how and when assets pass on, to protect vulnerable beneficiaries, and in some cases to manage the inheritance tax position of an estate.

The main types of trust behave very differently, both in how flexible they are and in how they are taxed. This article sets them out. It is part of our guide to Trusts in Estate Planning. To decide whether a trust fits your situation, our trusts service at /services/trusts can put a plan in place for you.

Bare trusts

A bare trust is the simplest form. The beneficiary has an absolute right to both the capital and the income, and can take full control once they reach 18. The trustees simply hold the assets until then. For tax purposes the assets are treated as belonging to the beneficiary, so income and gains are taxed as theirs, often at favourable rates if they have little other income.

Bare trusts are commonly used to hold assets for children, for example by grandparents. The trade-off is the lack of control: the beneficiary takes everything at 18, whether or not that is wise.

Interest in possession trusts

In an interest in possession trust, a beneficiary, often called the life tenant, has the right to the income from the trust assets, or to use the trust property, for a period, while the capital is preserved for others, often called the remaindermen. A common example is a trust that lets a surviving spouse live in a house or receive its income for life, with the house then passing to children.

These trusts are widely used in wills to provide for a second spouse while protecting capital for children from a first marriage. The tax treatment depends heavily on when and how the trust was created.

Discretionary trusts

In a discretionary trust, the trustees have discretion over how to distribute income and capital among a class of potential beneficiaries. No beneficiary has a fixed entitlement; instead the trustees decide who benefits, when, and by how much. This makes discretionary trusts the most flexible type, and the most useful where circumstances may change or where beneficiaries need protecting from themselves or from others.

That flexibility comes with the relevant property tax regime, explained below, which is the trade-off for the control these trusts provide.

The relevant property regime

Most lifetime trusts created since 2006, including discretionary trusts and most interest in possession trusts set up in lifetime, fall under what is called the relevant property regime. This brings three potential inheritance tax charges. They are not as alarming as they first appear, but they need to be understood and planned for.

The entry charge is a lifetime charge of up to 20 per cent on the value of assets put into the trust above the available nil-rate band. The ten-year charge, sometimes called the periodic charge, is up to 6 per cent of the value of the trust assets above the nil-rate band, recalculated every ten years. The exit charge applies when assets are distributed out of the trust, at up to 6 per cent, apportioned for the time since the last ten-year point. Many trusts holding assets within the nil-rate band see little or no charge in practice.

Trusts that sit outside the relevant property regime

Not all trusts are caught by the relevant property regime. Some have their own treatment, and choosing the right type for the purpose is part of the planning.

• Bare trusts are transparent for tax: the assets are the beneficiary's, so the relevant property charges do not apply.
• A trust for a disabled person can qualify for special treatment, often outside the relevant property regime, where strict conditions are met.
• Trusts created on death by a will can have particular treatment, including immediate post-death interests for a surviving spouse.
• Bereaved minor trusts and 18-to-25 trusts arising on a parent's death have their own rules.

Choosing between them

The choice of trust is a balance between control and tax. A bare trust is simple and tax-efficient but gives no ongoing control. A discretionary trust gives maximum control and protection but sits within the relevant property regime. An interest in possession trust sits in between, balancing income for one person against capital for others. The right answer depends entirely on what you are trying to achieve and for whom.

Common questions

Do trusts still save inheritance tax?

Trusts are less about saving tax outright and more about control, protection, and managing when and how value passes on. Putting assets into a relevant property trust can have its own charges, so the inheritance tax position needs to be modelled carefully rather than assumed to be beneficial.

Are trusts only for wealthy families?

No. Trusts are commonly used to protect young or vulnerable beneficiaries, to provide for a second spouse while protecting children, and to hold modest amounts for grandchildren. The structure matters more than the size of the estate.

Who manages the tax on a trust?

The trustees are responsible for the trust's tax affairs, including any relevant property charges and ongoing income tax. Many trustees appoint a specialist accountant to handle the calculations and reporting, which we can help arrange.