4.5 An Introduction to Trusts

This chapter sits outside the core scope of the RetirePlan pension guide. We include it because working through your retirement finances - especially in the context of the Inheritance Tax changes described in Chapter 4.4 - may naturally lead you to consider more structured approaches to managing and passing on assets. Trusts are one of the main tools available for this, and a basic understanding of how they work will help you have more informed conversations with a solicitor or financial adviser.

This guide covers the essential framework only. Trusts are a specialist area of law and taxation: the detail matters enormously, the rules are complex, and the wrong structure can be costly. Professional advice is essential before setting up or making decisions about any trust arrangement.

Source: GOV.UK - Trusts and Taxes (Crown copyright, Open Government Licence v3.0).

1. What Is a Trust?

A trust is a legal arrangement for managing assets - money, investments, property, or land - on behalf of other people. Three parties are always involved:

Role	Who they are and what they do
The Settlor	The person who creates the trust and transfers assets into it. The settlor decides how those assets should be used, usually setting this out in a legal document called the trust deed.
The Trustee	The person (or people) who legally owns and manages the assets on behalf of the beneficiaries. Trustees are responsible for day-to-day management, investment decisions and paying any tax due. There must always be at least one trustee.
The Beneficiary	The person (or group of people) who benefits from the trust - either through income it produces, the capital itself, or both. There can be more than one beneficiary.

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Why Are Trusts Used?

Trusts are set up for a range of reasons, including:

To control and protect family assets over time.
To provide for someone who is too young, or not capable, of managing money themselves.
To pass on assets during your lifetime or through your will.
To provide for a spouse during their lifetime while preserving the capital for children.
To manage assets for disabled or vulnerable beneficiaries with special tax treatment.

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A note on scope

Trusts range from straightforward bare trusts used to hold assets for children, to highly complex discretionary arrangements used in sophisticated estate planning. This guide focuses on the types most likely to be relevant to RetirePlan users thinking about pensions, inheritance, and family wealth. It does not cover non-resident trusts, commercial trusts, or the most technical aspects of trust taxation.

2. The Main Types of Trust

Each type of trust works differently - and is taxed differently. The key types you are most likely to encounter are:

Bare Trusts

In a bare trust, the assets are held in the name of the trustee, but the beneficiary has an absolute right to both the assets and any income from them. Once the beneficiary reaches 18 (in England and Wales) or 16 (in Scotland), they can demand the assets at any time.

Bare trusts are commonly used to hold assets for children until they are old enough to manage them - for example, money left to a grandchild in a will.

Example - bare trust
You leave your sister some money in your will. The money is held in trust. Your sister is entitled to the money and any income it earns. She can also take possession of any of the money at any time.
(Source: GOV.UK - Trusts and Taxes)

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Interest in Possession Trusts

In an interest in possession trust, the trustee must pass all income from the trust to the beneficiary as it arises. The beneficiary is entitled to the income but not necessarily to the underlying capital - which may be preserved for other beneficiaries (such as children) when the income beneficiary dies.

This structure is often used to provide income for a surviving spouse while protecting the capital for children from a previous relationship or marriage.

Example - interest in possession trust
You create a trust for all the shares you owned. The terms say that when you die, the income from those shares goes to your wife for the rest of her life. When she dies, the shares pass to your children.
Your wife is the income beneficiary and has an 'interest in possession'. She does not have a right to the shares themselves.
(Source: GOV.UK - Trusts and Taxes)

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Discretionary Trusts

In a discretionary trust, the trustees have flexibility to decide how trust assets are used. They can determine which beneficiaries receive payments, how much they receive, how often, and on what conditions. Neither the income nor the capital is allocated to any specific beneficiary in advance.

Discretionary trusts are often used where the settlor wants to retain flexibility - for example, to provide differently for grandchildren depending on their circumstances, or to protect assets for someone who may not be able to manage money responsibly.

Example - settlor-interested discretionary trust
You can no longer work due to illness. You set up a discretionary trust to make sure you have money in the future. You are the settlor - and you may also benefit from the trust because the trustees can make payments to you.
(Source: GOV.UK - Trusts and Taxes)

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Accumulation Trusts

In an accumulation trust, the trustees can retain income within the trust rather than paying it out, adding it to the trust's capital to grow over time. They may also be able to make payments to beneficiaries, as in a discretionary trust. This structure can be useful where the trustees wish to build up the fund before distributing it.

Will Trusts

A will trust is any trust created by someone's will that comes into effect on their death. Rather than leaving assets outright to a beneficiary, the will directs that assets are placed into a trust and managed according to its terms. Will trusts can take any of the forms above - bare, discretionary, interest in possession - depending on what the settlor (now deceased) intended.

Will trusts are a common mechanism for passing on a home to a surviving spouse while preserving an IHT nil-rate band for the eventual estate. They require careful drafting by a solicitor.

Trusts for Vulnerable Beneficiaries

Where a trust is set up for a disabled person or a bereaved minor (a child under 18 who has lost a parent), it may qualify for special tax treatment - reduced Income Tax, reduced Capital Gains Tax, and certain IHT exemptions. The rules on eligibility and the conditions required are specific, and professional advice is needed to set these trusts up correctly.

3. Trusts and Inheritance Tax

This is the area most relevant to pension and estate planning, and where trusts interact directly with the topics covered in Chapter 4.4. IHT can arise in connection with a trust in several situations:

When IHT may arise	What happens
Assets transferred into a trust	Transferring assets into most trusts (other than bare trusts) is treated as a 'chargeable lifetime transfer' and may trigger an immediate IHT charge of 20% on the value above the nil-rate band. If the settlor dies within 7 years, additional tax may be due.
Ten-year anniversary charge	Most trusts are subject to a periodic IHT charge every 10 years, based on the value of the trust's assets at that point. The charge is up to 6% of the value above the nil-rate band.
Exit charges (assets leaving the trust)	When assets are paid out of a trust to beneficiaries between anniversary dates, a proportionate exit charge may apply.
Death of the settlor	If the settlor transfers assets into a trust and dies within 7 years, the value of those transfers is added back to the estate. If 20% was already paid, the estate pays the remaining 20% to reach the full 40% rate.

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Special IHT Treatment for Certain Trusts

Not all trusts are subject to the ten-year charge and exit charges. The following benefit from more favourable treatment:

Bare trusts: Transfers in may be exempt from IHT if the settlor survives 7 years. No periodic charges apply.
Trusts for bereaved minors: No IHT charges if the assets are set aside solely for the bereaved minor and they become fully entitled by age 18.
Trusts for disabled beneficiaries: No ten-yearly charge or exit charge, provided the assets remain in trust for the disabled person's benefit.
Will trusts: A will trust set up on death and wound up within 2 years does not require registration and has simplified IHT treatment.

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Trusts and the 2027 Pension IHT Change

One consequence of the April 2027 pension IHT changes (see Chapter 4.4) is that some people are considering whether placing pension death benefits into a trust on death could offer any IHT advantage. The short answer, under the new rules, is that unused pension funds will generally be included in the estate before any trust distribution - so the old planning strategy of using pension nominations to direct funds into trust largely loses its IHT benefit.

However, trusts may still play a role in how pension death benefits are managed and distributed to beneficiaries once any IHT is settled - particularly where there are minor children, vulnerable dependants, or a desire to control the timing of distributions. This is an area where the rules are still being worked through and specialist advice is particularly important.

4. Trusts and Income Tax

The Income Tax treatment of a trust depends on its type. The key points for each are:

Trust type	Who pays Income Tax	Rate
Bare trust	The beneficiary (not the trustee)	Beneficiary's own Income Tax rate - personal allowance may apply
Interest in possession trust	The trustee	20% on most income; 10.75% on dividends
Discretionary / accumulation trust	The trustee	45% on most income; 39.35% on dividends
Settlor-interested trust	The settlor (tax paid by trustee on their behalf)	Depends on trust type
Vulnerable beneficiary trust	The trustee (with a tax reduction)	Reduced rate - calculated to approximate the beneficiary's personal position

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Most trusts have a tax-free income threshold of £500 per year. Discretionary and accumulation trusts pay tax at their headline rates (45% / 39.35%) on all income above this amount - significantly higher than individual income tax rates. This is one reason why trusts are not simply a way of sheltering income from tax; in many cases they pay tax at a higher rate than an individual would.

Beneficiaries who receive income from a trust may be able to reclaim some of the tax paid by the trustees through Self Assessment, depending on their personal tax position.

5. Trusts and Capital Gains Tax

Capital Gains Tax (CGT) can arise when assets are moved into or out of a trust, or when the trust sells or disposes of assets that have increased in value.

When CGT May Be Payable

When assets are transferred into a trust: The settlor (or the person selling the asset to the trust) may be liable for CGT on any gain at that point.
When assets are transferred out of a trust: The trustees are generally liable for CGT based on the market value of the assets when the beneficiary becomes entitled to them.
When the trust sells an asset: Trustees pay CGT on the gain above the trust's annual exempt amount.
Bare trusts: No CGT when assets are transferred to the beneficiary - the beneficiary inherits the original cost base.

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Annual Exempt Amount for Trusts

For the 2026/27 tax year, the CGT annual exempt amount for trusts is £1,500 (or £3,000 for trusts with a vulnerable beneficiary). This is lower than the individual annual exempt amount, and it is shared between trusts if the same settlor has set up more than one.

Reliefs Available to Trustees

Trustees may be able to reduce or defer CGT through a number of reliefs:

Private Residence Relief: No CGT when selling a property that is the main residence of someone entitled to live there under the trust deed.
Hold-Over Relief: No immediate CGT if assets are transferred to a beneficiary (or to other trustees) - the gain is deferred until the recipient sells the asset.
Business Asset Disposal Relief: Trustees pay a reduced CGT rate on qualifying gains from business assets used in a beneficiary's business.

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6. Registering a Trust

Most trusts are required to be registered with HMRC's Trust Registration Service (TRS). In general, a trust must be registered if it becomes liable for any UK tax - including Income Tax, CGT, IHT, Stamp Duty Land Tax, or Stamp Duty Reserve Tax. Some trusts must register even if they have no immediate tax liability.

Trusts that do not need to register include:

Trusts that hold assets of a UK registered pension scheme.
Trusts holding certain life or retirement policies (where the policy only pays out on death, terminal illness, or disability).
Charitable trusts registered as charities in the UK.
Will trusts that hold only estate assets and are wound up within 2 years of death.
Trusts set up for bereaved minors under a will or intestacy rules.

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If you are unsure whether a trust needs to be registered, a solicitor or tax adviser can advise. Failure to register when required can result in penalties from HMRC.

7. Trustee Responsibilities

Being a trustee is a significant legal responsibility. If you are asked to act as a trustee - or are considering appointing one - it is important to understand what is involved. Trustees are the legal owners of the trust's assets and are personally liable for ensuring the trust is properly managed and taxes are paid on time.

Key trustee responsibilities include:

Managing and investing the trust's assets in accordance with the trust deed and the beneficiaries' interests.
Filing annual Trust and Estate Tax Returns with HMRC and paying any Income Tax and CGT due.
Reporting and paying any IHT due at ten-year anniversaries, on exit charges, or when assets are transferred in.
Registering the trust with HMRC's Trust Registration Service where required.
Providing beneficiaries with statements of income and tax paid, on request.
Keeping clear records - bank statements, investment records, and details of all transactions.
Notifying HMRC of any changes to the trust.

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Where there are two or more trustees, one should be nominated as the principal acting trustee for tax purposes - though all trustees remain jointly accountable.

8. Trust Types at a Glance

Trust type	Who pays Income Tax	Rate
Bare trust	The beneficiary (not the trustee)	Beneficiary's own Income Tax rate - personal allowance may apply
Interest in possession trust	The trustee	20% on most income; 10.75% on dividends
Discretionary / accumulation trust	The trustee	45% on most income; 39.35% on dividends
Settlor-interested trust	The settlor (tax paid by trustee on their behalf)	Depends on trust type
Vulnerable beneficiary trust	The trustee (with a tax reduction)	Reduced rate - calculated to approximate the beneficiary's personal position

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9. When to Seek Professional Advice

A trust can be a powerful tool - but it is also a binding legal structure with ongoing tax obligations and fiduciary duties. Setting one up, or being named in one, without taking proper advice is a common and costly mistake.

You should speak to a solicitor or specialist financial adviser if:

You are considering setting up a trust as part of your estate or IHT planning.
You want to provide for a vulnerable or disabled family member in a tax-efficient way.
You have been asked to act as a trustee and want to understand your obligations.
You have received an inheritance or pension death benefit that is being paid via a trust.
You want to understand how a trust in your will might interact with the 2027 pension IHT changes.
You own a business or property and want to explore whether a trust could form part of your succession planning.

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The Society of Trust and Estate Practitioners (STEP) is the professional body for trust and estate specialists in the UK. A STEP-qualified adviser has specific expertise in this area and can be found via www.step.org.

RetirePlan Adviser Search

If reading this chapter has prompted questions about whether a trust might be relevant to your own circumstances, a good starting point is a conversation with a regulated financial adviser or solicitor who specialises in estate planning. The RetirePlan Adviser Search can help you find a regulated adviser in your area.

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