Trusts & Trust Administration
for your estate

Trusts are one of the most useful and most misunderstood tools in estate planning. Used well, a trust lets you pass value on while keeping control over when and how beneficiaries receive it, protect assets for vulnerable or young beneficiaries, and in some cases manage the inheritance tax position. Used carelessly, a trust adds cost, reporting, and tax charges with no real benefit. The first job a specialist does is the honest one: deciding whether a trust belongs in your plan at all.

Where a trust does belong, the next questions are which type and how to run it compliantly. The choice between a bare trust, an interest-in-possession trust, and a discretionary or relevant property trust drives the tax treatment, the trustees' powers, and the ongoing administration. Relevant property trusts carry their own inheritance tax cycle of entry, ten-year, and exit charges, alongside income tax, capital gains tax, and registration on the Trust Registration Service.

We set up and run trusts as part of our regular work, so the structure is matched to the purpose and the compliance is handled properly year after year. We model the tax and prepare the trust returns; the solicitor drafts the trust deed. We understand the relevant property regime rather than treating a trust as a box to tick.

A trust is a legal relationship in which trustees hold assets for the benefit of others, the beneficiaries, under the terms of a trust deed. The reason to use one is almost always about control and protection rather than tax: keeping capital out of the hands of a young or vulnerable beneficiary until the right time, ensuring a survivor is provided for while preserving capital for children, or protecting assets from being dissipated. The tax treatment then follows from the type of trust chosen, and getting that match right is the whole game. A specialist starts by asking what outcome you want, not which trust you have heard of.

Bare trusts are the simplest form. The beneficiary is absolutely entitled to the assets and the income, and for tax purposes the assets are usually treated as the beneficiary's own. They are often used for holding assets for a minor who will take them outright at 18, and they carry no separate inheritance tax regime of their own. Interest-in-possession trusts give a named beneficiary the right to the income (or to use the asset, such as living in a house) for a period, with the capital passing to others afterwards. These are common in will trusts for a surviving spouse and in second-marriage planning, and their inheritance tax treatment depends on when and how they were created.

Most lifetime trusts created today are relevant property trusts, which includes discretionary trusts where the trustees decide who benefits and when. The relevant property regime carries its own inheritance tax cycle. Putting assets into the trust above the available nil-rate band can trigger an entry charge of up to 20%. The trust then faces a periodic charge of up to 6% of the value above the nil-rate band on each ten-year anniversary, and exit charges between anniversaries when capital leaves the trust. None of these rates is automatic; each depends on the trust's history and value, which is precisely why a specialist runs the calculation rather than assuming a worst case or, worse, ignoring the charges altogether.

Every trust now has to be considered for registration on HMRC's Trust Registration Service. The register captures the trustees, settlor, and beneficiaries, and most trusts holding assets are required to register, with penalties for failing to do so. Registration is not a one-off: details have to be kept up to date, and the trust's compliance has to be confirmed each year. Many older family trusts created before the register existed are still unregistered, and an early task for a specialist taking on an existing trust is often to bring its registration and filing history into order.

Trusts pay their own income tax and capital gains tax, generally at rates that are less favourable than an individual's, with discretionary trusts taxed at the highest trust rates on income above a small standard-rate band. Beneficiaries who receive income from a trust may be able to reclaim tax depending on their own circumstances, and capital distributions can trigger exit charges and capital gains consequences. The trust's annual tax return, the maintenance of trust accounts, and the calculation of any charges are ongoing obligations on the trustees, who can be held personally responsible for getting them right. This is the running cost that a suitability review has to weigh against the benefit before a trust is set up.

Trustees carry real legal duties: to act in the beneficiaries' best interests, to act impartially between them, to invest prudently, to keep proper accounts, and to comply with the trust's tax obligations. Many people accept a trusteeship without understanding the responsibility, and inactive or uninformed trustees are a frequent source of problems years later. A specialist not only sets the trust up but supports the trustees in discharging these duties, or flags where a professional trustee is the safer choice. Whether a trust belongs in your plan, and whether you are equipped to run it, are questions worth answering before the deed is ever signed.

Existing trusts with a gap in their compliance history are a common situation a specialist inherits. A family trust set up years ago may never have registered on the Trust Registration Service, may have missed ten-year anniversary calculations, or may have unfiled tax returns. The remedial work is to establish the trust's full history, register it, bring the filings up to date, and calculate any charges that fell due in the meantime. This is detailed reconstruction work and is far better done proactively than after an HMRC enquiry, because the trustees can be personally liable for the failures.

Trusts for vulnerable beneficiaries can qualify for special tax treatment that reduces the trust's income tax and capital gains tax to what the beneficiary would have paid personally, and can affect the inheritance tax position. The qualifying conditions are specific and the election has to be made and maintained correctly. A trust set up to support a disabled family member that is not structured to meet these conditions can end up paying far more tax than necessary, so this is an area where the type of trust and the wording of the deed matter a great deal and should be handled by someone familiar with the regime.

Putting the family home into a lifetime trust is one of the most heavily marketed and most frequently mis-sold ideas in this field. Where the person who puts the property in continues to live in it, the gift with reservation of benefit rules generally pull the value straight back into their estate for inheritance tax, so the hoped-for saving does not arise, while the trust still carries cost, reporting, and potential charges. A specialist will usually advise against home-into-trust schemes pitched as inheritance tax savers and explain why the arithmetic does not work, which is exactly the kind of plain answer the matching is meant to deliver.

Will trusts behave differently from lifetime trusts and interact closely with the nil-rate bands. A nil-rate band discretionary trust written into a will was once a standard way to use the first spouse's band, but the introduction of the transferable nil-rate band changed the calculus and made many such trusts unnecessary or even counterproductive. Existing wills that still contain them should be reviewed, because what was sound planning a generation ago can now waste the transferable band or complicate the residence nil-rate band claim. The accountant models the effect and the solicitor updates the will.