Should I set up a trust?

A trust is a legal way to manage money, property, or other assets for someone else. When you set up a trust, you decide who will look after these assets (the “trustees”) and who will benefit from them (the “beneficiaries”). The rules for how the assets are managed and used are set out in a legal document called a trust deed.^{Footnote [1]}

The trust fund is simply the collection of assets held within the trust. This could be cash, investments, or property. Trustees are responsible for looking after the trust fund and making sure it’s used according to your wishes. ^{Footnote [1]}  

Trusts are often used for estate planning, helping children save for the future, or supporting someone who might need extra help managing money. Trusts offer a way to protect assets and make sure they’re used in the right way, at the right time.^{Footnote [1]}

Setting up a trust can offer several advantages, depending on your personal and financial goals. Some common reasons include:

1. Protecting assets for the future - a trust can help you safeguard your money, property, or investments for future generations. By placing assets in a trust, you can make sure they are managed responsibly and only used in ways you approve. This is especially useful if you want to provide for children or grandchildren, or if you have concerns about how assets might be handled after you’re gone.  
2. Supporting vulnerable beneficiaries - trusts can be set up to support people who may need extra help managing money, such as children, adults with disabilities, or those who are unable to make financial decisions for themselves. Trustees are responsible for making decisions in the best interests of these beneficiaries, ensuring their needs are met and their assets are protected. ^{Footnote [2]} 
3. Managing estate planning - trusts are a key tool in estate planning. They allow you to decide exactly how and when your assets will be passed on, which can help avoid disputes and make the process smoother for those you care about. Trusts can also help reduce the time and complexity involved in probate, making it easier for beneficiaries to access what you leave behind.  
4. Managing inheritance planning - in some cases, trusts can help reduce the amount of inheritance tax that may need paying on your estate. By placing assets in a trust, you might be able to keep them outside of your estate for tax purposes, which could mean more of your wealth goes to your chosen beneficiaries. However, tax rules are complex and change over time, so it’s important to get professional advice before making decisions about trusts and tax planning.^{Footnote [3]}

A trustee is the person (or sometimes an organisation) responsible for managing the assets in a trust. They act as the legal owner of those assets, but they don’t benefit from them. Their job is to look after the trust and make decisions in line with the trust deed and trust law. ^{Footnote [1]}

Trustees have important duties. They must:

• follow the instructions in the trust deed.
• act in the best interests of the beneficiaries.
•  keep accurate records of all transactions.
• handle tax reporting and payments for the trust.
• avoid conflicts of interest and manage the trust responsibly.

Choosing trustees is a big decision. You need people who are reliable, financially responsible, and willing to take on the role. Trustees can be family members, friends, professionals (like solicitors), or even organisations such as banks or trust companies.   

Trustees play an important role, and following the rules helps keep everything running smoothly. In the UK, most trusts need to be registered with HMRC, and doing this correctly ensures compliance and helps avoid issues in the future.  ^{Footnote [4]}

There are several types of trusts used in the UK, each with its own rules and purposes. The type of trust you choose will depend on your goals, who you want to benefit, and how you want assets to be managed.

Bare trusts

A bare trust is the simplest type. Assets are held by trustees, but the beneficiary has the right to all the capital and income at any time (if they’re 18 or over in England and Wales, or 16 in Scotland). Bare trusts are often used to pass assets to young people, with trustees looking after them until the beneficiary is old enough. ^{Footnote [5]}  

Interest in possession trusts

In an interest in possession trust, the beneficiary gets the income from the trust as it’s earned, after costs are covered. For example, you could set up a trust so that a family member receives the income from investments for the rest of their life, while the actual assets go to someone else later. ^{Footnote [5]}  

Discretionary trusts

Discretionary trusts give trustees the power to decide how to use the trust income and sometimes the capital. Trustees can choose which beneficiaries receive payments, how much they get, and when. These trusts are useful if you want flexibility, or if beneficiaries may need different levels of support at different times.^{Footnote [5]}

Accumulation trusts

With accumulation trusts, trustees can accumulate income within the trust and add it to the capital, rather than paying it out. They may also have the power to pay income out, similar to discretionary trusts.^{Footnote [5]}

Mixed trusts

A mixed trust combines elements of different types of trusts. For example, part of the trust might be discretionary, while another part is an interest in possession. And each part is taxed according to its own rules. ^{Footnote [5]} 

Settlor-interested trusts

These are trusts where the person who set up the trust (the settlor), or their spouse or civil partner, can benefit from the trust. Special tax rules apply to these trusts. ^{Footnote [5]}  

Lifetime trusts vs will trusts

A lifetime trust is set up and takes effect while you’re still alive. A will trust (sometimes called a testamentary trust) is created by your will and only comes into effect after your death. Both types can be used for estate planning, but the timing and tax treatment may differ.^{Footnote [3]}

Trusts in the UK are subject to tax, but the rules vary depending on the type of trust and the assets involved.

How trusts are taxed

Different taxes can apply to trusts, including Income Tax, Capital Gains Tax, and Inheritance Tax. Trustees are usually responsible for paying these taxes on behalf of the trust. For example, income from investments held in a trust may be taxed at special trust rates, and gains from selling assets can attract Capital Gains Tax.^{Footnote [1]}

• The nil-rate band - for Inheritance Tax, most trusts benefit from the tax-free allowance (called the nil-rate band), which is currently £325,000. This means that up to this amount can usually be passed on without paying Inheritance Tax. However, if the value of assets in the trust exceeds this threshold, tax charges may apply. ^{Footnote [6]} 
• The 20% charge - When you put assets into certain trusts, like discretionary trusts, you might pay an initial tax charge of up to 20% on anything above the nil-rate band. Some trusts also have charges every 10 years and when assets are taken out, so it’s worth planning ahead. ^{Footnote [7]}

Can trusts reduce Inheritance Tax?

Trusts can sometimes help reduce Inheritance Tax (IHT), but it depends on the type of trust and how it’s set up. When assets are placed in certain trusts, they may no longer count as part of your estate for tax purposes, provided specific conditions are met. This can mean less tax is due when you pass away.^{Footnote [8]}

However, it’s not always straightforward. Some trusts attract their own tax charges, such as the 20% entry charge on amounts above the nil-rate band and periodic charges every 10 years (as above). So while trusts can be useful for estate planning, they’re not a guaranteed way to save on tax costs. ^{Footnote [7]}

And it’s worth remembering that tax should never be the only reason for setting up a trust. Rules are complex and change over time, so getting professional advice is essential before making any decisions.^{Footnote [3]}

Setting up a trust involves a few key steps. While the process can seem complex, breaking it down makes it easier to understand.

1. Decide on the type of trust - The first step is choosing the right type of trust for your needs. Different trusts offer different levels of control, flexibility, and tax treatment. For example, a bare trust is simpler and gives beneficiaries full access at a certain age, while a discretionary trust allows trustees to decide how and when assets are used.  
2.  Draft the trust deed - The trust deed is the legal document that sets out the rules for the trust, including who the trustees and beneficiaries are, what assets are included, and how they should be managed. Because the wording needs to be precise, it’s strongly recommended to use a solicitor to avoid costly mistakes.  
3. Appoint trustees - Trustees are responsible for managing the trust and acting in the best interests of the beneficiaries. Choose people you trust, often family members or close friends, or consider professional trustees if the trust is complex. Make sure they understand the responsibilities involved. ^{Footnote [9]} 
4. Understand the roles
   • Settlor: The person who creates the trust and transfers assets into it.
   • Trustee: The person or organisation that manages the trust according to the trust deed.
   • Beneficiary: The person or people who benefit from the trust
5. Transfer assets into the trust - Once the trust is set up, you’ll need to move the chosen assets (such as money, property, or investments) into the trust. From this point, trustees manage those assets according to the trust deed.
6. Register the trust with HMRC - Most trusts in the UK must be registered with HMRC through the Trust Registration Service. This is a legal requirement and helps ensure compliance with tax and anti-money laundering rules. ^{Footnote [4]} 
7.  Keep the trust compliant - Trustees must keep records up to date and report any changes to HMRC. Not doing so can lead to penalties, so regular reviews are important. ^{Footnote [10]}  

Setting up a trust usually involves solicitor fees, which vary depending on complexity. There may also be tax charges, such as Inheritance Tax or entry charges for certain trusts, so professional advice is essential. Trusts can be powerful tools, but they come with responsibilities and costs. Speaking to a qualified adviser ensures your trust is structured correctly and meets your goals.

If you have £300,000 or more in pensions and investments, Aviva Financial Advice can help you explore whether a trust is right for you.