UK trusts basics — bare, interest in possession, discretionary and the trust register
Quick answer: A trust separates legal ownership (held by trustees) from beneficial ownership (the people who actually benefit).
A trust separates legal ownership (held by trustees) from beneficial ownership (the people who actually benefit). UK trusts are used to protect children's inheritances, manage assets for vulnerable beneficiaries, and structure family wealth. Tax treatment varies sharply by trust type.
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Primary source: https://www.gov.uk/trusts-taxes
Bare trusts
The simplest trust: trustees hold legal title but the beneficiary has an absolute right to the assets and income. Once the beneficiary turns 18 (16 in Scotland) they can demand the assets.
Income and gains are taxed on the beneficiary. Where a parent gifts to their own minor child and the income exceeds £100 a year, the parental settlement rules tax it on the parent instead. Grandparents are not caught by this rule.
Bare trusts are not part of the IHT relevant property regime — gifts in are PETs and the assets sit in the beneficiary's estate from day one.
Interest in possession trusts
A life tenant has the right to the income (or use of an asset such as a house) for life. On their death, the capital passes to the remaindermen.
Created on death by will (an 'immediate post-death interest' or IPDI), the assets are treated as in the life tenant's estate for IHT — useful for spousal exemption and for engaging the residence nil-rate band.
Lifetime IIP trusts created after 22 March 2006 are taxed under the relevant property regime — gifts in are chargeable lifetime transfers, and 10-yearly and exit charges apply.
Discretionary trusts
Trustees have full discretion over which of the named beneficiaries receive distributions and when. Beneficiaries have no entitlement until trustees exercise their discretion.
Gifts in are chargeable lifetime transfers — 20% IHT on the excess over the nil-rate band, plus a possible 10-yearly charge of up to 6% of the trust fund's value over the nil-rate band, plus exit charges when distributions are made.
Income is taxed at the trust rate (currently 45% on non-dividend income, 39.35% on dividends) after the £500 standard rate band. Beneficiaries receive distributions with a 45% tax credit and reclaim if they're a basic or non-taxpayer.
Trust Registration Service (TRS)
Most express UK trusts must register on the TRS, including non-taxable trusts created after 6 October 2020. Excluded categories include pension scheme trusts, charitable trusts and some 'pilot' trusts under £100.
Registration deadlines: 90 days from creation for new trusts; existing non-taxable trusts had to register by 1 September 2022. Penalties for late registration start at £100 with deliberate failures attracting tax-geared penalties.
Trustees must keep the register up to date, including changes to settlors, beneficiaries and trust assets.
Common questions
- Do I need a trust to pass money to my grandchildren?
- Often no — gifts under the annual exemption (£3,000) or as PETs can be made outright to grandchildren without a trust. A bare trust is useful where they're under 18, to keep assets in a named account until majority.
- Will my children pay IHT on a life-interest trust?
- On the life tenant's death, the trust assets are treated as in their estate for IHT and the children (as remaindermen) inherit the underlying assets. The trust itself uses any available nil-rate band, residence nil-rate band and spousal exemption.
- Are insurance policies in trust caught by the TRS?
- Life policies written in trust where no premiums have been added since registration and which only pay out on death or terminal illness are excluded from TRS. Most family protection policies fall in this exemption — but the trust still exists for IHT.