Every type of trust explained and simplified

Trusts are one of those things everyone nods knowingly about at dinner parties – like beta-blockers or the blockchain – but few could string together more than a couple of sentences about them without a furtive Google search under the table.

In this guide, we'll strip away the jargon and explain what trusts really are, why people use them, how they're taxed, and why the Channel Islands sometimes get involved.

By the end, you'll understand trusts well enough to explain them to your accountant's accountant. Or failing that, your uncle who still thinks "family trust" means letting him borrow a tenner.

What is a trust?

A trust sounds mysterious until you realise it's basically a legal container for money, property or investments, designed to make sure they end up where you want them – think of it as very fancy Tupperware with instructions Sellotaped to the lid.

The person who sets it up (the settlor) puts assets into this container and lays out a rulebook – usually a trust deed or will – spelling out who gets what, when, and under what conditions.

Control of those assets passes to one or more trustees, who are legally obliged to follow that rulebook to the letter. They manage, invest, and protect the assets, often while nervously eyeing the beneficiaries' expectations.

The beneficiaries are the people (or sometimes causes) meant to benefit. They might get income, the use of a property or the eventual ownership of the assets – depending on how generous the settlor was feeling when they drew it up.

You'll sometimes see the term inter vivos, which just means "while you're alive" – as opposed to the trusts created by your will, when you're not in much of a position to complain about the paperwork or solicitors' fees.

To sum up, every trust involves three key players:

• Settlor: the person putting assets into the trust and writing the rulebook
• Trustee: the person or institution holding the legal keys to the vault, responsable for running it
• Beneficiary: the lucky one(s) who get to enjoy the spoils, whether that's rental income, dividends or property.

Why set up a trust?

We'll get to the different species of trusts soon – promise – but first let's sanity-check why anyone would even bark up this tree in the first place.

To keep a grip on family money

If a beneficiary is too young, too impulsive or simply not built for spreadsheets, a trust can manage their money for them.

Parents can use them to hold cash until their children reach an appropriate age; likewise, if someone has a disability or reduced capacity, a vulnerable beneficiary trust can provide support without tripping up eligibility for state benefits.

To reduce inheritance tax and family drama

Trusts are a staple of estate planning because they let you choreograph how wealth flows between generations.

Want your partner to live off the income but the capital to pass to the kids later? An interest in possession trust is just the ticket.

Want to stop everything from being swallowed by inheritance tax? Again, there are structures for that. They can also help limit the number of arguments over your worldly possessions at the wake.

To give now (with strings attached)

Putting assets into a trust while you're alive often triggers inheritance tax straight away if the gift is large, and the trust may face ongoing charges too – so it's not a simple "wait seven years and it's tax-free situation".

The real advantage is control. For example: your child gets to live in the house, but they can't remortgage it to fund a luxury mushroom-foraging app.

To keep your privacy

Unlike wills, which become public record once they've gone through probate, trusts operate quietly behind the scenes. That appeals to anyone who'd rather not see their finances dissected in the tabloids or the family WhatsApp group.

That said, many UK-connected trusts must register on HMRC's Trust Registration Service; it isn't public, but limited access exists for people with a legitimate interest.

Also, if your assets are dotted around the globe, a trust can spare your executors from the joyless tangle of probate in multiple countries.

For good deeds (and good karma)

Trusts can power charitable foundations, which hold money for public benefit – funding scholarships, saving hedgehogs or backing whatever cause you've got a bee in your bonnet about.

Succession planning for complex assets

If you've got assets like a business or a property portfolio, a trust can make the handover smoother – ideally without anyone delivering a profanity-laced monologue in a glass-walled boardroom.

The trust can hold the shares or properties while professional trustees keep things ticking over until the heirs are ready. It's the calmer, paperwork-heavy version of Succession.

Types of trusts

There are several flavours of trusts in the UK, each with its own rules, quirks and use-cases.

They all run on the same basic engine (settlor sets the rules, trustees run the show, beneficiaries enjoy the spoils), but they're tuned for different situations.

If you're UK-resident or UK-domiciled, the usual suspects you'll come across are:

• Bare trusts
• Discretionary trusts
• Interest in possession trusts
• Settlor-interested trusts
• Trusts for vulnerable people
• Offshore trusts
• Accumulation trusts
• Mixed trusts.

We'll walk through each of these without legal jargon, Latin incantations or requiring you to summon a tax lawyer as though they were a Pokémon.

Bare trusts (also called absolute trusts)

A bare trust is the simplest setup of the lot – so simple that legally, it's barely a trust at all.

The beneficiary owns everything outright; the trustee is just there to hold the asset until the beneficiary is old enough to take the wheel without crashing it into a hedge.

If you're the beneficiary and you're 18 or over (16 in Scotland), you can simply say: "I'll take that, thanks" – and the trustees hand it over.

Key features

• The beneficiary has an absolute right to the assets and any income
• The trustee has zero discretion
• Once the beneficiary becomes an adult, they can demand the assets and, in practice, the trust ceases to have any real effect.

Use cases

Bare trusts are mostly used when children are involved.

• Parents or grandparents set aside money for a minor
• In wills where a child inherits but isn't yet old enough to manage it
• Child investment or savings accounts often operate as bare trusts
• Temporary holding arrangements, like a nominee shareholder situation.

Basically it's a gift with a lock programmed to open when they're old enough.

Tax treatment

For tax, HMRC looks straight through the trust with Superman-like X-Ray version:

• Income tax → taxed as the beneficiary's income
• Capital gains tax → taxed as the beneficiary's gain.

If the beneficiary is a child with little or no income, this can be neatly tax-efficient. However, there's a booby trap to be aware of:

If the parent is the settlor and the child earns over £100 a year from the gift, HMRC taxes it back on the parent's return. That stops parents sneakily using their children's tax allowances to dodge tax on investments. That £100 rule vanishes once the beneficiary turns 18.

Pros

• Very simple to set up and run
• Can use the child's tax allowances and lower tax rates
• No trust-level tax complexity.

Cons

• Zero control once they're 18 (decades of scrimping blown on a fleet of quadbikes...)
• The gift is irrevocable (no takebacks if they refuse to take out the rubbish or walk the dog)
• No protection if the beneficiary later divorces or goes bankrupt.

You'll find way more detail here: Everything you need to know about bare trusts

P.S., Bare trusts are just one way to save for kids – there's also junior ISAs and junior SIPPs. We compare all options in the video below:

Discretionary trusts

A discretionary trust is the family money equivalent of a "keep them guessing" strategy.

Instead of promising everyone a fixed slice of the pie, the trustee decides who gets served, when they get served, and whether it's a hearty portion or crumbs.

Key features

• The trustees hold full discretion over distributions of both income and capital.
• They can accumulate income (keep it in the trust) instead of paying it out; however, holding onto the income has tax implications (see below).
• The settlor can leave a letter of wishes to nudge trustees ("please prioritise university costs for my grandchildren" etc.), but it's non-binding.
• Trustees must consider all potential beneficiaries fairly and impartially, even if Aunt Carol is everyone's least favourite.

Use cases

Discretionary trusts put the power in the trustees' hands, letting them respond to whatever chaos life throws at the beneficiaries.

• Estate planning when you don't know yet who will need help: the future surgeon may need less than the future poet.
• Protecting spendthrifts or vulnerable loved ones who might otherwise turn the inheritance into a string of stories that all end with, "Well... you only live once."
• Keeping creditors and ex-spouses away from the pot, because no guaranteed entitlement means far slimmer pickings for anyone trying to grab a slice.
• Holding funds back as a long-term safety net, ready for medical costs, education needs, or a family-wide cash-flow crisis.

Tax treatment

HMRC treats discretionary trusts like they're up to no good, slapping them with top-tier tax rates:

• Income tax → trustees pay 45% on most income and 39.35% on dividend income, with only the first £500 at basic rates.
• Capital gains tax → trustees pay 24% on gains (including residential property), with only half the normal annual allowance.
• Inheritance tax → treated as a relevant property trust, so there can be an entry charge if you put in more than the nil-rate band, then 10-year charges of up to 6 percent, and exit charges when the capital is paid out.

Because trustees pay the highest trust rates once income goes over £500, it often works out more expensive to let income pule up inside the trust.

The silver lining: when income is paid out, it carries a 45% tax credit. That means if your personal tax rate is lower than 45%, you can reclaim the difference.

Example: The trust receives £1,000 of income and pays £450 tax at 45%, so £550 is paid to you with a £450 tax credit attached. If you pay tax at 20%, you can reclaim £250 of that back from HMRC – so you keep £800 and HMRC keeps £200.

Here you see the benefit of paying income out: instead of £450 vanishing to HMRC, a basic-rate beneficiary can rescue £250 from the taxman's clutches.

Pros

• Massive flexibility – trustees adapt to changing fortunes.
• Protection against divorces, debts or disastrous life choices.
• Keeps control with responsable adults rather than the family wild cards.

Cons

• High taxes on income and gains.
• More admin than a teenager's driving test paperwork.
• Professional trustees and accountants don't work for hugs – costs can rack up.

Learn more about the rules, quirks, and how to set up a discretionary trust in our full guide.

Interest in possession trusts (also called life interest trusts)

An interest in possession (IIP) trust gives one person the automatic right to all income the trust generates as it arises, typically for life.

They're sometimes called life interest trusts because one person (the "life tenant") enjoys the income now, while someone else (the "remainderman") gets the capital later. It's how you look after one loved one today without accidentally disinheriting another tomorrow.

Key features

• One beneficiary has a fixed right to all trust income as it arises
• The trustees still control and invest the underlying capital assets
• The capital is preserved for the remaindermen – usually children – when the life tenant's interest ends
• The income beneficiary cannot demand capital or redirect who ultimately gets it.

Use cases

• Providing for a spouse while protecting the children's inheritance, especially in second-marriage situations
• Letting someone live in a property (use and enjoyment) while ensuring ownership passes to someone else later
• "Interest for age" planning, where a child receives income until a milestone birthday and then inherits the capital. (In this specific case, the income beneficiary and the remainderman are the same person, just at different points in time)
• Supporting an elderly or vulnerable relative, while keeping the long-term benefit aimed at the next generation.

Tax treatment

Because the income beneficiary is entitled to the income, HMRC mostly taxes the trust as if the income were theirs.

• Income tax → trustees pay 20% on most income and 8.75% on dividends before passing it to the beneficiary
• Capital gains tax → trustees pay 24% on gains (including residential property), with only half the usual annual allowance
• Inheritance tax → if the life interest is created for a spouse via a will, the trust is taxed as part of the spouse's estate on death; otherwise, it is usually subject to the standard trust charges (periodic and exit charges).

If the beneficiary pays a higher rate than 20%, they make up the difference. If they're a basic-rate payer or non-taxpayer, they can reclaim some or all of the tax the trustees deducted.

Example: The trust receives £1,000 income, pays £200 tax, and the beneficiary receives £800; a basic-rate taxpayer can reclaim that £200 from HMRC, so they still end up with £1,000 and no further tax to pay.

Pros

• Certainty for the income beneficiary – they know they'll receive the income
• Good for keeping everyone happy in inheritance planning
• Can be more tax-efficient than discretionary trusts if the income beneficiary isn't a top-rate taxpayer.

Cons

• Rigid – income must be paid out even if reinvesting would be better
• Life tenant's needs can conflict with the remaindermen's growth interests
• If the life tenant lives to 112, the remaindermen will have to wait a long time to see their inheritance.

Settlor-interested trusts

This isn't a separate kind of trust structure, but a category any trust can fall into if the settlor (or their spouse/civil partner) can benefit from it.

In other words, if you set up a trust and you or your spouse are also potential beneficiaries of that trust, it's "settlor interested".

For instance, you create a discretionary trust for your family and include yourself or your spouse/civil partner just in case you need a cheeky little hand out down the line.

You can do that, but be warned, it will be considered settlor-interested. The same applies if you put assets in trust but retain a right to income: also settlor-interested.

Key features

• Applies when the settlor or their spouse could receive income or capital from the trust
• Can apply to any trust type – discretionary, interest in possession, bare, etc
• The taxman (rather astutely) deduces that, since you can benefit, you didn't really "give it away".

Use cases

• Keeping a safety net in case your finances hit a bumpy patch later
• Protecting assets from future risks while still leaving yourself in the queue if needed
• Common in families where the settlor says: "just in case, include me too".

Tax treatment

HMRC sees what you're doing, and they're not impressed. Settlor-interested trusts are taxed as if the settlor still owned everything.

• Income tax → all trust income is treated as the settlor's income while they (or their spouse/civil partner) can benefit. Trustees can pay first, but the settlor must declare it and gets credit
• Capital gains tax → gains are normally taxed on the trustees at the trust CGT rate (24%) with the trust's reduced annual exempt amount, not on the settlor
• Inheritance tax → if the settlor keeps a benefit, gift-with-reservation rules can pull the assets back into their estate; otherwise, the trust is in the relevant-property regime (10-year and exit charges).

If the trustees pay the tax first, the settlor must put the full income/gain on their own tax return, and HMRC will give credit for what the trustees already paid – the end result is exactly the same tax bill the settlor would have faced if they held the asset personally.

Example: The trust earns £1,000 and pays £450 tax, leaving £550 in the pot; the settlor still has to report £1,000 of income and can reclaim some back (if they're a lower-rate taxpayer). There is no tax saving – just a lot of pointless paperwork.

Pros

We've struck a fairly negative tone so far, but there are real reasons why someone would want a settlor-interested trust:

• Provides a safety net if the settlor later becomes ill or financially vulnerable – trustees can step in a help
• Keeps assets out of beneficiaries' names, which can protect family wealth from their creditors or divorces
• Ensures assets are managed by trusted adults if the settlor later can't manage money themselves (for example due to dementia).

Cons

• No tax benefit while the settlor can benefit
• Inheritance tax rules often treat the gift as still in the settlor's estate.

Vulnerable beneficiary trusts (trusts for vulnerable people)

These trusts are designed for disabled beneficiaries or minor children who have lost a parent.

HMRC recognises these arrangements are usually about care, not clever tax planning, so qualifying trusts can access special tax reliefs that stop them being hammered by the usual high trust tax rates.

Key features

• The beneficiary must be a disabled person (meeting HMRC criteria) or a child under 18 who has lost a parent
• Trustees must keep only the vulnerable person's share separate if the trust has multiple beneficiaries
• Trustees must submit a Vulnerable Personal Election – a simple HMRC form that confirms the trust qualifies for the special tax treatment
• The trust must be for the vulnerable person's benefit (not a backdoor benefit for the settlor)
• Unlike bare trusts, the beneficiary does not automatically take control at 18 if disabled or incapable.

Use cases

• Providing controlled long-term support for a disabled family member who could not manage money safely
• Ensuring an inheritance for an orphaned child, while guaranteeing proper management until adulthood
• Protecting means-tested benefits or shielding wealth from people who might exploit a vulnerable person.

Tax treatment

Qualifying trusts can reduce their tax bill to match the beneficiary's tax position, not HMRC's top trust rates.

• Income tax → trustees can claim a deduction so only the tax the beneficiary would owe is ultimately paid
• Capital gains tax → trustees pay it only if gains exceed the trust's allowance: £3,000 for trusts with vulnerable beneficiaries and £1,500 for other trusts
• Inheritance tax → for disabled-person trusts (one subset of vulnerable-beneficiary trusts) the usual 10-year periodic charges and exit charges don't apply provided the conditions are met.

Trustees normally pay first at trust rates, then claim a refund of the excees.

Example: The trust earns £1,000, trustees pay £450 at trust-rates and distribute £550. Provided the trust qualifies and the vulnerable person's own tax liability would have been £0, the trustees claim a deduction of £450 – so effectively the full £1,000 is available for their benefit.

Pros

• Preserves family resources for actual care rather than HMRC's biscuit fund
• Protects someone who is financially vulnerable from losing or mismanaging their inheritance
• Allows relatives to plan responsibly without attempting avoidance.

Cons

• Relief applies only while the beneficiary remains vulnerable under HMRC rules
• Heavy emphasis on paperwork, proof and compliance
• Relevant only in specific family situations – not a general planning tool.

Offshore trusts (non-resident trusts)

So far we've focused on UK-based trusts. Offshore trusts are those set up with trustees outside the UK (e.g., Jersey, Guernsey, Isle of Man, Cayman).

High-wealth individuals often hear about them for reasons like asset protection or tax mitigation. However, the UK's anti-avoidance rules mean their benefits are far narrower than folklore or angry panelists on BBC Question Time would have you believe.

Key features

• A trust is classed as non-resident if none of the trustees are UK-resident for tax purposes, or only some are UK-resident and the settlor was non-resident when the trust was created or funds were added
• For trusts created on or after 6 April 2025, the settlor's domicile no longer affects residence status
• Where a trust has both UK and non-UK trustees, the settlor's residence at the time of creation or addition determines whether it counts as non-resident
• Non-resident trustees pay UK tax only on UK-source income; UK residents linked to the trust (settlors or beneficiaries) may still be taxed on worldwide income under anti-avoidance rules.

Use cases

• Holding non-UK assets or interests while avoiding complicated probate or forced heirship rules in multiple countries
• Ring-fencing assets in jurisdictions with stable legal systems, away from political or economic risk at home
• Accessing global investment flexibility, multi-currency structures or specific custody arrangements not easily available onshore
• Planning when you are not UK resident (or leaving the UK) so you legitimately sit outside the UK tax net.

Tax treatment

The UK taxman takes offshore trusts seriously. If you or your family can benefit and you are UK resident, special rules apply:

• Income tax → if you, your spouse or civil partner can benefit from the trust, you'll be taxed on its income as if it were your own. Trustees of a non-resident trust only pay UK tax on UK-source income
• Capital gains tax → trustees generally don't pay UK CGT on overseas assets, but UK-resident settlors or beneficiaries may be taxed on gains realised by the trust
• Inheritance tax → before April 2025, trusts holding non-UK assets could be outside UK inheritance tax if the settlor wasn't domiciled in the UK when the assets entered the trust. That loophole has now closed. From 2025, a new "long-term UK resident" test applies: if someone has been tax resident in the UK for 10 years or more in the last 20, their non-UK assets (including those in trust) may be caught by UK IHT.

Example: John, a UK resident, settled £5 million in a Jersey trust. The trust's income used to sit outside UK tax while "protected" under the old rules for non-doms. As of April 2025, those protections have been removed for long-term UK residents, so John must now pay UK tax on that income as it arises – the offshore "safe haven" effect has vanished into thin air. Poof.

Pros

• Still useful for non-tax goals: asset protection, global estate structuring and legal diversification
• Works legitimately if you are not UK resident (and you plan non-UK assets or heirs) – tax benefits may apply
• Provides neutral jurisdiction for worldwide assets and complex family structures.

Cons

• For UK residents, there is no guaranteed tax benefit – you'll likely pay UK tax anyway
• Heavy compliance: offshore trust reporting, UK trust register, complex tax returns
• Mistakes can trigger large penalties and unexpected UK tax bills.

Accumulation trusts

This isn't really a separate "kind" of trust. It just means the trustees are allowed to accumulate income instead of paying it out, rolling it back into the pot like a Eurovisions jackpot that nobody won.

Most discretionary trusts already work like this, so an accumulation trust is basically a discretionary trust that chooses to save rather than spend. It follows the same tax rules as a discretionary trust – the higher trust tax rates and the periodic IHT charges.

Mixed trusts

A mixed trust is a hybrid: part of it behaves like one trust type, part like another. For example, one slice might give someone a right to income (like an interest in possession trust) while the rest is discretionary.

HMRC then taxes each slice under its own rules. It's not something most people set up deliberately; it usually appears in more complex family planning situations.

Trust types at a glance

Trusts can be brilliant tools – or expensive headaches if you wing it. Always get regulated financial advice or legal advice before setting one up, preferably from someone who knows their inter vivos from their elbow.

Here's a quick rundown of each trust type we covered, when they make sense and the potential pitfalls:

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