Trusts have a reputation for being complicated, and some of it is deserved. But the idea at the centre is simple. One person (the settlor) hands assets to other people (the trustees) to look after for the benefit of someone else (the beneficiaries). The trust deed sets out the rules. That separation of legal ownership from benefit is what makes trusts useful for families: money can be set aside for children or grandchildren, protected from a divorce or a business failure, or kept in careful hands for someone who cannot manage it themselves.
The complication comes from tax. Because a trust can be used to move wealth out of an estate, HM Revenue and Customs taxes trusts under their own set of rules, and those rules differ depending on the type of trust. This guide sets out the main types you are likely to meet, and how each one is treated for inheritance tax, income tax and capital gains tax in the 2026/27 tax year.
The three trust types that matter most
GOV.UK lists several kinds of trust, but three account for almost all family arrangements.
Bare trusts. The simplest form. The trustee holds the assets in their name, but the beneficiary is entitled to all of the capital and income, and can call for them at any time once they are 18 (16 in Scotland). Bare trusts are often used to hold investments for a child. Because the beneficiary is treated as the real owner, the trust itself is largely invisible to the tax system.
Interest in possession trusts. Here one beneficiary (the life tenant) has the right to the income of the trust as it arises, or to use a property held in it, for life or for a fixed period. The capital then passes to other beneficiaries. This structure is common in wills, where a surviving spouse has the income for life and the children receive the capital afterwards.
Discretionary trusts. The trustees decide who among a class of beneficiaries receives anything, when, and how much. Nobody has a fixed right to income or capital. That flexibility is the attraction: the settlor can name children and grandchildren who are not yet born, and the trustees can respond to circumstances decades later. It is also why discretionary trusts carry the heaviest tax treatment.
GOV.UK also describes accumulation trusts (where trustees can add income to capital, taxed like discretionary trusts), mixed trusts, settlor-interested trusts (where the settlor or their spouse can benefit) and trusts for vulnerable people, which have their own reliefs.
Inheritance tax: the entry, ten-year and exit charges
For inheritance tax, the key date is 22 March 2006. Since then, most lifetime transfers into trusts, and most assets held in trusts, fall into what HMRC calls the relevant property regime. Discretionary trusts and nearly all interest in possession trusts created in lifetime after that date are relevant property trusts.
The regime has three charges.
The entry charge. A gift into a relevant property trust is a chargeable lifetime transfer, not a potentially exempt transfer. If the amount going in, added to any other chargeable transfers in the previous seven years, is above the nil rate band of £325,000, inheritance tax is charged at 20% on the excess at the time of the gift. If the settlor dies within seven years, HMRC recalculates the tax at the full 40% rate and the estate pays the difference, subject to taper relief in the same way as for outright gifts. The seven-year gifting rule guide explains how that taper works.
The ten-year charge. On every tenth anniversary of the trust, inheritance tax is charged on the value of the relevant property above the nil rate band. The rate is worked out from a formula, but the maximum is 6%. On a trust holding £1 million with a full nil rate band available, the charge would be at most 6% of £675,000, or £40,500.
Exit charges. When capital leaves the trust, whether to a beneficiary or because the trust ends, a proportionate charge applies based on how much of the ten-year period has passed since the last anniversary. Again, the effective rate cannot exceed 6%.
Two exceptions are worth knowing. Transfers into a bare trust are potentially exempt transfers, so they escape inheritance tax altogether if the settlor survives seven years, and the assets sit in the beneficiary's estate rather than in a regime of their own. Trusts for a disabled person are outside the ten-year and exit charges, and gifts into them are also potentially exempt transfers. Trusts for young people aged 18 to 25 have a modified regime with exit charges only between those ages.
Interest in possession trusts set up before 22 March 2006, and those created on death for a spouse (an immediate post-death interest), are treated differently: the assets are counted as part of the life tenant's estate when they die, rather than being charged every ten years.
The nil rate band is fixed at £325,000 until 5 April 2031 under section 72 of the Finance Act 2026. Because it has not risen since 2009, more trusts cross it every year.
Income tax inside a trust
Trustees pay income tax on what the trust earns, and the rate depends on the type of trust.
For accumulation and discretionary trusts, the trustees pay the trust rates: 45% on savings, rental and other income, and 39.35% on dividends. Since April 2024 there has been a small allowance: a trust with total income of £500 or less in the year pays no income tax on it and does not need to report it. If the settlor has more than one such trust, the £500 is divided between them, down to a floor of £100 each once there are five or more. When income is later paid to a beneficiary, it carries a 45% tax credit, so a basic-rate taxpayer can reclaim the difference.
For interest in possession trusts, the trustees pay only the basic rates: 20% on non-dividend income and, from 6 April 2026, 10.75% on dividends, up from 8.75%. The life tenant then reports the income on their own return and pays any higher or additional rate tax due.
For bare trusts, the trust is ignored. The beneficiary declares the income personally and can use their own personal allowance. There is one long-standing anti-avoidance rule for parents: if a parent puts money into a bare trust for their own child under 18 and the income is more than £100 a year, it is taxed as the parent's income.
Where the settlor or their spouse can still benefit, the trust is settlor-interested and the income is taxed on the settlor, whatever type of trust it is.
Capital gains tax when trust assets are sold
Trustees pay capital gains tax at 24% on gains from 6 April 2026, regardless of the type of asset. Trusts have their own annual exempt amount of £1,500 for 2026/27, half the individual figure, and it is shared between trusts created by the same settlor since 1978. Trusts for a vulnerable beneficiary get the full £3,000.
Gifts into and out of trusts are disposals for capital gains tax. Putting a property or a share portfolio into a discretionary trust is treated as a sale at market value. Holdover relief can usually defer that gain into the trust, and again when assets come out to a beneficiary, so the tax is paid when the asset is eventually sold rather than when it moves. The relief has to be claimed, and it is not available on transfers into a settlor-interested trust. Assets in a bare trust are treated as the beneficiary's own, so nothing is triggered when they are handed over.
Registration and running costs
Almost every UK express trust must be registered on HMRC's Trust Registration Service, whether or not it pays tax. A new trust must be registered within 90 days of being created. The exclusions are narrow: trusts holding under £2,000 with no UK land and no tax to pay, will trusts wound up within two years of death, and a few statutory categories.
Trustees then have annual duties: a self assessment trust return where there is income or gains, ten-year anniversary returns for relevant property trusts, and record-keeping that can stretch across decades. Professional trustees and solicitors charge for this. A trust is a long-term commitment, and the running costs belong in the comparison alongside the tax saved.
Where trusts fit in family planning
The honest summary is that trusts are not a way of avoiding inheritance tax. A discretionary trust pays its own version of it, in instalments of up to 6% every ten years, and the entry charge means that only the nil rate band can go in without tax. What a trust offers is control: assets can leave the estate now, while the settlor still shapes who benefits and when. For a family with young grandchildren, a child going through a divorce, or a relative who cannot manage money, that control is often the point.
Whether a trust is the right vehicle, which type, what to put in it and how to sequence it against outright gifts and the nil rate band, is exactly the kind of judgement an independent financial adviser makes alongside a solicitor who drafts the deed. If you would like to be introduced to a vetted, whole-of-market independent adviser, tell us what you need and our team will personally make the introduction, free and without obligation.