Trusts · 12 min read · Published · Updated
Trusts explained: a plain-English guide to how trusts work in England and Wales
What a trust is, who is involved and the main types. It also covers how trusts are taxed and when one might matter for your family.
By Aaron Johnson, Consultant Solicitor and TEP, a solicitor in Bridlington who writes every guide himself.
This guide is general information about the law of England and Wales, not legal advice. Each case is assessed on its own merits.
Guides · Trusts · No. 12 of 12Reviewed · 12 minutes
What is a trust?
A trust is a legal arrangement. One person (the "settlor") transfers assets to one or more people (the "trustees") to hold and manage for the benefit of others (the "beneficiaries").
The key idea is that legal ownership is separated from benefit. The trustees own the assets in law, but not for themselves. They hold them for the beneficiaries and must manage them according to the terms of the trust and the law.
The people involved
The settlor. The person who creates the trust and puts assets into it. For a trust created by a will, the settlor is the person who has died.
The trustees. The people who manage the trust assets. Trustees must act in the beneficiaries' best interests, act impartially and follow the terms of the trust. Trustees can be family members, friends or professionals such as solicitors or accountants.
The beneficiaries. The people who benefit. Depending on the type of trust, a beneficiary may have a fixed right to income or capital, or may be one of a wider group whom the trustees can choose to benefit.
Common types of trust
Bare trusts (or simple trusts). The trustees hold assets for a named beneficiary who has an absolute right to the capital and the income. Once the beneficiary is 18, they can demand the assets. Bare trusts are often used to hold assets for children.
Life interest trusts (interest in possession trusts). A named beneficiary (the "life tenant") has the right to the income from the trust assets, or the right to use an asset (such as living in a property), for their lifetime. When the life tenant dies, the capital passes to other named beneficiaries. Couples often use them to protect assets for children from a previous relationship.
Discretionary trusts. The trustees decide how to distribute income and capital among a defined group of beneficiaries. No beneficiary has a right to anything. The trustees decide who benefits, when and how much. This flexibility makes discretionary trusts useful for protecting assets from a beneficiary's divorce, bankruptcy or poor money management.
Disabled person's trusts. Trusts set up for someone who is disabled, with favourable tax treatment.
Accumulation and maintenance trusts. An older type of trust that builds up assets for children. Its special tax treatment closed to new trusts on 22 March 2006. From 6 April 2008, existing ones kept it only where the children take the assets outright at 18. A new trust of this kind follows the inheritance tax rules for discretionary trusts.
Lifetime trusts and will trusts
Lifetime trusts are set up during the settlor's lifetime by signing a trust deed and transferring assets into the trust. They take effect at once and can have immediate tax consequences.
Will trusts are created by the terms of a will and only take effect when the person dies. Common examples are a life interest trust for a surviving spouse and a discretionary trust for children.
Where does your half of the home go?
A will trust for a blended family, shown one step at a time.
What trusts are used for
Trusts serve many legitimate purposes: protecting assets for future generations, providing for vulnerable beneficiaries, inheritance tax planning, preventing sideways inheritance and, with important caveats, protecting against care home fee assessments.
On the last point, a local authority can treat a transfer into a trust as "deliberate deprivation of assets" if a significant motivation was to reduce your assets for means-testing. It need not be the main purpose. Councils also ask whether a need for care was foreseeable at the time. There is no fixed time limit, and the seven-year inheritance tax rule does not apply to care fees. Genuine estate planning reasons help, but they do not guarantee the outcome.
The tax position of trusts
Trusts have their own tax rules. Transfers into most trusts are "chargeable lifetime transfers". If the total exceeds the nil-rate band of £325,000, there may be an immediate inheritance tax charge of 20%. Most discretionary trusts also pay a periodic charge (up to 6%) every ten years and exit charges when capital is paid out. So do most lifetime life interest trusts made since 22 March 2006. A life interest that begins on death under a will does not pay these charges. Nor does a qualifying disabled person's trust. How income tax and capital gains tax apply depends on the type of trust. Discretionary trusts usually pay income tax at the highest rates. A bare trust's income and gains are normally taxed as the beneficiary's.
Registration requirements
Since 2022, most trusts must be registered with HMRC's Trust Registration Service (TRS). Failing to register can lead to penalties.
A word of caution
Trusts are powerful, but they are not a magic solution. A badly structured trust can create more problems than it solves. Some trusts have been mis-sold, particularly so-called "asset protection trusts" marketed as a way to avoid care home fees or inheritance tax.
Any trust should be set up with clear aims and advice from a suitably qualified solicitor.
If you are considering a trust, contact Aaron. He is a solicitor and a TEP, a full member of STEP, the Society of Trust and Estate Practitioners. He can advise on the full range of options.
This guide is general information, not legal advice.
Sources
The official pages behind the rules this guide explains. Each was checked on .
Written by Aaron Johnson, Consultant Solicitor and TEP · Law of England and Wales as at 11 June 2026 · Ends
