1. I get asked this all the time – what is a trust and can it save tax?
In simple terms!
Trusts are legal arrangements where a person places assets (money, property, investments) into a separate legal thing – a trust – to manage for beneficiaries, often set out in a trust deed or a will. Every knows what a company is, but there are other and better kinds of trusts which may help you in these tough times.
For example – in a company, the directors are trustees of the company’s assets and liabilities, and they owe a duty to the shareholders who are beneficiaries and more generally to people dealing with the company, like creditors, clients or customers.
HOWEVER trusts governed by laws like the Trustee Act 2000 and the Trusts of Land and Appointment of Trustee Act or the Trustees Act 1925, trusts are powerful tools for estate planning, protecting assets, and tax efficiency—particularly reducing Inheritance Tax (IHT) at 40% above thresholds, Capital Gains Tax (CGT), and Income Tax.
As of 2026, the IHT nil-rate band remains frozen at £325,000 per person (£650,000 for couples, transferable), with an additional residence nil-rate band of £175,000 (£350,000 for couples) when passing a home to direct descendants (tapered for estates over £2 million).
2. Different kinds of trusts
There are lots of different types of trust, too many to list entirely. Examples are listed below. If you are new to trusts then you’re going to need help and advice to work out how to use them effectively – get in touch by clicking here
2.1 Bare Trust
The simplest. Trustees hold assets, but beneficiaries (e.g., children or grandchildren) have absolute rights to capital and income at age 18. Assets are treated as the beneficiary’s for tax. Planning benefits: Perfect for direct gifting—assets exit the settlor’s estate immediately as a Potentially Exempt Transfer (PET). No IHT if the settlor survives 7 years; uses the nil-rate band if needed. Ideal for parents/grandparents funding education or homes while minimising IHT.
2.2 Interest in Possession Trust
A beneficiary (life tenant, e.g., surviving spouse) gets all income (e.g., dividends, rent), but capital passes to others (remaindermen, e.g., children) on their death. Planning benefits: Common in wills for second marriages—spouse enjoys lifetime income, children get capital intact. Spousal transfers are IHT-exempt; helps defer CGT on trust asset sales.
2.3 Discretionary Trust
This is one that is most commonly thought of when people think you can reduce or avoid tax. Trustees have full discretion over distributions of income/capital to a class (e.g., children/grandchildren). No fixed rights. Planning benefits: Excellent flexibility—protects assets from beneficiaries’ divorce, bankruptcy, or poor decisions. For tax: Lifetime gifts are Chargeable Lifetime Transfers (CLTs)—no immediate 20% IHT if within nil-rate band; survives 7 years to escape estate IHT. Subject to up to 6% periodic (10-year anniversary) and exit charges on excess over nil-rate band. Allows “generation skipping” to reduce overall family IHT; distributions can go to lower-rate taxpayers. Click here to see how a discretionary trust could be used to mitigate risks like social care costs
2.4 Accumulation Trust
Trustees can accumulate income as capital for growth. Planning benefits: Builds funds for future needs (e.g., minors’ university); defers Income Tax until distribution, potentially at beneficiaries’ lower rates.
2.5 Mixed Trust
Combines elements (e.g., part fixed income, part discretionary). Planning benefits: Tailored for complex families—balances security with flexibility and targeted tax reliefs.
2.6 Vulnerable Person Trust
For disabled or bereaved minors; qualifies for special rules. Planning benefits: Income/CGT taxed at beneficiary’s rates (often lower); protects while minimising tax.
2.7 Charitable Trust
For public benefits (e.g., education, relief). Planning benefits: Fully exempt from IHT, CGT, and most Income Tax; donors get reliefs—ideal for philanthropy with major savings. One overlooked aspect of charities is that they are not permitted to expose trust assets to trading risks e.g. the can’t buy and sell stuff to make a profit (makes you think as they all seem to do this!)
2.8 Pension Trusts
Hold retirement funds. Planning benefits: Tax-relieved contributions, growth tax-free; often IHT-exempt on death if discretionary. Something of a sensitive issue in 2026!
2.9 Implied trusts
A court or a judge can ‘imply’ a trust to correct an unfairness or legal wrong e.g. receiving money by mistake – this makes you a trustee of the money and you hold it for the benefit of it’s true owner, it is implied that you ought to return the money to the true owner.
Trusts can remove assets from estates (reducing IHT exposure), enable controlled inheritance, protect vulnerable people, and shift tax to lower-rate family members. Anti-avoidance rules apply (e.g., settlor-interested trusts taxed harshly). Professional advice is crucial—rules are intricate, with reporting requirements and potential penalties.(Word count: 748)
3. Other common forms of trusts –
Joint ownership of property – joint tenants or tenants in common, executors of an estate with Probate or Intestacy grants, or a person selling a property to a buyer – the seller holds the property on trust for the buyer until the transfer is registered at the land registry.
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