Trusts in UK financial planning

Trustees have full discretion over if, when and how much income or capital is distributed, and to which beneficiaries. Beneficiaries have no automatic entitlement.

Common use cases:

• families needing flexibility due to uncertain future needs
• protecting assets from beneficiaries’ creditors, divorces, and immaturity
• providing for multiple generations where needs may differ
• holding investments for long-term estate planning.

Primary tax planning advantage:

• IHT: Transfers into a Discretionary Trust are treated as Chargeable Lifetime Transfers. No immediate inheritance tax is payable where the transfer, when combined with earlier chargeable gifts made in the previous seven years, remains within the available nil rate band. Amounts above this threshold may be subject to a 20% lifetime charge. After seven years, the assets fall outside the settlor’s estate, although the trust will be subject to ongoing periodic and exit charges.
• CGT: Holdover relief is generally available on transfers into the Trust.

Assets are held by Trustees, but the beneficiary is absolutely entitled to capital and income at age 18 (England/Wales) or 16 (Scotland).

Common use cases:

• gifts to children for future costs such as university or a house deposit
• simple inheritance arrangements where outright ownership is intended at adulthood
• passing assets quickly without inheritance conditions.

Primary tax planning advantage:

• IHT: Gifts into a Bare Trust are treated as Potentially Exempt Transfers (PETs) and fall outside the estate after 7 years.
• Income/CGT: The beneficiary is normally taxed directly on trust income and gains, which can allow use of their personal allowances. However, where the settlor is a parent and the beneficiary is their minor child, the parental settlement rules apply. Under these rules, if trust income arising to the child exceeds £100 per tax year, the income is taxed on the parent rather than the child. Capital gains remain taxable on the child.

A beneficiary (the ‘life tenant’) has an immediate right to income as it arises, while capital is preserved for other beneficiaries.

Common use cases:

• second marriages where income is needed for a spouse, but capital is preserved for children
• providing ongoing income while keeping capital protected
• Wills that stagger wealth transfer across generations.

Primary tax planning advantage:

• IHT: Most new interest in possession trusts are taxed under the relevant property regime (10-year and exit charges).
• CGT: Hold over relief available in many cases when assets are transferred, provided the trust is not settlor interested.

These Trusts, now older and no longer newly available in modern form, allow Trustees to accumulate income or apply it for a child’s maintenance, education, or general benefit until they reach a specified age.

Common use cases:

• older family trusts used to support education or living costs
• structured wealth transition to young adults.

Primary tax planning advantage:

• now taxed like discretionary trusts under the relevant property regime (unless they were altered to give an entitlement at age 18)
• accumulated income increases the future capital available to beneficiaries.

A Trust in which the settlor (or their spouse/civil partner) can benefit.

Common use cases:

• asset protection where the settlor may still require access
• special arrangements where the settlor may need occasional benefit
• income support arrangements within families.

Primary tax planning disadvantage:

• Income Tax: All trust income is taxed on the settlor, regardless of whether it is actually received.
• Capital Gains Tax: The trust is treated as settlor interested, meaning CGT hold over relief is generally unavailable and gains may be attributed back to the settlor.
• Inheritance Tax: These trusts are not effective for IHT planning. As the settlor (or their spouse/civil partner) can benefit, the trust assets are typically treated as remaining within the settlor’s estate for inheritance tax purposes. As a result, the structure does not achieve meaningful IHT mitigation, while still being subject to the relevant property regime and its associated complexity.

The settlor gifts a sum into Trust (usually via an investment bond) but retains a fixed withdrawal right for life (or until the bond runs out). This retained right reduces (‘discounts’) the taxable value of the gift.

Common use cases:

• reducing IHT but still receiving regular withdrawals
• clients with predictable income requirements
• estate freezing strategies for those with surplus assets.

Primary tax planning advantage:

• IHT: Part of the gift is immediately outside the estate due to the discount; the remainder becomes exempt after 7 years.
• Investment growth is outside the estate from day one.

The settlor lends money to a Trust rather than gifting it. The loan is repayable on demand, but all investment growth belongs to the trust.

Common use cases:

• clients wanting IHT planning without giving away capital
• those needing the ability to access the original capital gradually
• estate freezing strategies where growth escapes the estate.

Primary tax planning advantage:

• IHT: The original loan remains in the estate, but all growth is outside the estate immediately.
• No seven-year PET/CLT rule applies to the loan itself.

A discretionary trust holding a segmented investment bond. At each maturity point (“reversion”), the settlor may take the proceeds or allow the trustees to defer them.

Common use cases:

• Clients who want IHT planning while preserving optional access to capital
• Those uncertain about future income, care costs, or changing needs
• Multi-generational planning requiring flexible timing and control

Primary tax planning advantage:

• IHT: The gift is a full CLT, falling outside the estate after 7 years; investment growth is outside the estate from day one.
• The ability for trustees to defer payments avoids gift with reservation issues.

A Trust created for a beneficiary who is disabled or otherwise meets the HMRC definition of a vulnerable beneficiary. Trustees can elect for special tax treatment.

Common use cases:

• beneficiaries with long term disabilities
• beneficiaries unable to manage financial affairs
• protecting entitlement to means tested benefits while providing support.

Primary tax planning advantage:

• Trustees can elect for more favourable income tax and CGT treatment, often reducing tax liability to what the beneficiary would pay personally
• offers structured support without compromising welfare benefits.