For most UK families, the honest answer is no — you don’t need a complex trust to protect your estate. The combined £325,000 nil-rate band and £175,000 residence nil-rate band, plus the spousal exemption, already shelter the average estate. Trusts genuinely earn their keep in narrower cases: controlling when children inherit, protecting a vulnerable beneficiary, or putting a life-insurance policy in trust so it pays out fast and outside your estate. The rest is often oversold. Here’s how to tell the difference.
Related reads: wills, power of attorney & probate and inheritance tax planning.
What a trust actually is
A trust is a legal arrangement where one set of people looks after assets for the benefit of another. Three roles matter. The settlor is the person who puts assets in — cash, property, investments or a life policy. The trustees are the legal owners who manage those assets and must act in the beneficiaries’ best interests. The beneficiaries are the people who ultimately benefit. You can be more than one of these at once, though mixing roles carefully matters for tax.
The core idea is separation: legal ownership sits with the trustees, but the benefit flows to someone else, on terms the settlor sets out in a trust deed. That separation is what lets a trust do things a simple gift or a will cannot — like releasing money to a child gradually rather than in one lump at 18.
The main types of trust
Four types cover almost everything an ordinary family will encounter. Each behaves differently for control and for tax.
| Type | How it works | Best for |
|---|---|---|
| Bare (absolute) trust | Beneficiary is fixed and entitled to everything at 18; assets taxed as theirs | Simple gifts to a specific child or grandchild |
| Discretionary trust | Trustees decide who gets what and when, from a class of beneficiaries | Flexibility, vulnerable or unpredictable beneficiaries, blended families |
| Interest in possession | One beneficiary has a right to the income (or to live in a property) for life; capital passes to others later | Providing for a spouse while protecting capital for children |
| Life policy in trust | A life-insurance policy is written in trust so the payout goes to chosen beneficiaries | Fast, IHT-free payout outside the estate — cheap and often free to set up |
Discretionary and most lifetime interest-in-possession trusts fall under the “relevant property regime” for inheritance tax, which is where the periodic charges below come in. Bare trusts and policies in trust generally do not.
What trusts are genuinely useful for
Strip away the marketing and trusts do a handful of things very well. Controlling timing and conditions: rather than a teenager receiving £200,000 outright at 18, trustees can release money for education, a house deposit or a set age. Protecting a vulnerable beneficiary: a disabled child or someone who struggles with money can be provided for without handing them direct control. Protecting capital across relationships: an interest-in-possession trust lets a surviving spouse live off assets while ringfencing the capital for children from a first marriage.
The single most useful move for ordinary families is writing a life-insurance policy in trust. The payout bypasses probate, so beneficiaries receive it in weeks rather than months, and because it falls outside your estate it is normally free of inheritance tax. Most insurers offer the trust forms at no cost. If you have life cover and a family, this is usually the one trust worth doing.
Figures above are illustrative only; actual timings vary by insurer, estate complexity and probate workload.
The inheritance tax position in 2026
For 2026/27 the nil-rate band remains £325,000 and the residence nil-rate band £175,000, both frozen to the end of 2030/31, with the £2 million RNRB taper threshold unchanged. Relevant property trusts — mainly discretionary and most lifetime interest-in-possession trusts — carry their own inheritance tax charges:
- Entry charge: putting more than your available nil-rate band into a relevant property trust during your lifetime triggers an immediate IHT charge of 20% on the excess.
- 10-year periodic charge: every tenth anniversary the trust pays up to 6% (a maximum effective rate, being 30% of the 20% lifetime rate) on the value above the available nil-rate band — in practice often far less.
- Exit charge: when capital leaves the trust between anniversaries, a pro-rated charge applies based on time elapsed since the last ten-year point or the trust’s creation.
From 6 April 2026, Agricultural and Business Property Relief are ignored when calculating the effective rate for exit charges, aligning them with the ten-year charge rules. This is a technical change but a relevant one if your trust holds a business or farmland — a clear flag to take professional advice.
Income tax and capital gains inside a trust
Trusts are taxed heavily on income they retain. For 2026/27, trustees of discretionary trusts pay income tax at 45% on rental, savings and other income and 39.35% on dividends, above a small £500 standard-rate band. For capital gains, trusts get only a £1,500 annual exempt amount (half an individual’s), with CGT at 24% on residential property and other assets.
These are punitive rates compared with most individuals, which is exactly why retaining income inside a discretionary trust is rarely tax-efficient. Bare trusts are different — income and gains are taxed as the beneficiary’s, often at a child’s low or nil rate — which is part of their appeal for simple gifts.
Registration: the Trust Registration Service
Most UK express trusts must register on HMRC’s Trust Registration Service (TRS), generally within 90 days of creation, or within 30 days where the trust becomes liable to tax. Trustees must also keep the register up to date and, since 2026, a trust must be registered before it can report a property disposal to HMRC. Penalties apply for late or missing registration, and the obligation sits with the trustees. This ongoing admin is part of the true cost of running a trust, not a one-off.
Costs and complexity
A life policy written in trust usually costs nothing — you complete the insurer’s form. A bespoke discretionary or interest-in-possession trust is a different proposition: solicitor fees to draft the deed, potential entry charges, annual trustee duties, TRS registration, ongoing accounts and tax returns, and the periodic and exit charges above. Many families pay hundreds or thousands of pounds a year to run a trust that delivers little benefit beyond what a well-drafted will already provides. Complexity is a cost in itself.
When a trust is overkill — and when it helps
Overkill for most: a couple with an estate under the combined £1 million of allowances, leaving everything to each other and then the children. The spousal exemption and nil-rate bands do the work; a will and a life policy in trust are usually enough. Be wary of any “family protection trust” or “asset protection trust” sold cold as a way to dodge care fees — these are frequently mis-sold, and deliberate deprivation of assets rules can unwind them.
Genuinely helpful: young children who shouldn’t inherit large sums outright; a disabled or vulnerable beneficiary; second marriages where you want to provide for a spouse but protect capital for your own children; business or farmland assets; or estates large enough that structured planning saves real inheritance tax. In these cases a trust can be the right tool — but it should be chosen, drafted and reviewed with a qualified adviser.
Why professional advice matters here
Trusts sit at the intersection of tax, family and property law, and small drafting choices have large consequences. A STEP-qualified solicitor or a chartered tax adviser can tell you in one meeting whether a trust earns its keep for your situation or whether a straightforward will achieves the same outcome for a fraction of the cost. Free guidance from MoneyHelper and gov.uk is a sensible starting point, but the decision to create a relevant property trust should not be made from an article — including this one.
Frequently asked questions
Do I need a trust to avoid inheritance tax?
Usually not. The £325,000 nil-rate band, the £175,000 residence nil-rate band and the spouse exemption shelter most estates without any trust. Trusts can save IHT on larger or more complex estates, but they bring their own periodic and exit charges. Take advice before assuming a trust reduces your bill.
What is the 10-year charge on a trust?
Relevant property trusts, mainly discretionary trusts, face an inheritance tax charge on each tenth anniversary of up to 6% on the value above the available nil-rate band. The actual rate is often much lower, and many smaller trusts pay nothing because they sit within the band.
Should I put my life insurance in trust?
For most people, yes. Writing a life policy in trust means the payout goes straight to your chosen beneficiaries, normally free of inheritance tax and without waiting for probate. Insurers usually provide the trust form free of charge. It is one of the few trust arrangements that suits almost any family.
How are trusts taxed on income in 2026?
For 2026/27, discretionary trustees pay 45% on rental and savings income and 39.35% on dividends above a £500 band, with a £1,500 capital gains exemption and 24% CGT. These high rates make retaining income inside a discretionary trust rarely tax-efficient. Bare trusts are taxed as the beneficiary’s own income instead.
Do I have to register a trust with HMRC?
Most UK express trusts must register on HMRC’s Trust Registration Service, generally within 90 days of creation or 30 days of becoming taxable. Trustees must keep details current, and since 2026 a trust must be registered before reporting a property disposal. Penalties apply for late registration.
Last reviewed: June 2026. This article is general information, not personal, legal or tax advice. Trusts are a specialist area — always take advice from a STEP-qualified solicitor or chartered tax adviser before creating one, and check current rules at gov.uk and MoneyHelper.