Types of Trust in UK Law: Discretionary, Bare, Interest in Possession, and Accumulation

Trusts are one of the oldest tools in English law for managing and transferring wealth. In the modern context, they remain relevant for estate planning, tax efficiency, protecting assets for vulnerable beneficiaries, and structuring family wealth across generations. But the terminology is often opaque, and the wrong choice of trust structure can result in poor tax outcomes or unexpected restrictions on how funds can be used.

This guide explains the main types of trust used in UK planning, how they are taxed, and the circumstances in which each is appropriate.

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What Is a Trust?

A trust is a legal arrangement in which one person (the settlor) transfers assets to another (the trustee or trustees) to hold for the benefit of one or more beneficiaries. The trustee holds legal title to the assets but must use them in accordance with the terms of the trust.

The key parties are:

• Settlor: the person who establishes the trust and contributes assets to it. The settlor can also be a trustee and, in some structures, a beneficiary — though being all three has IHT consequences
• Trustees: individuals or a corporate trustee company responsible for managing the trust assets and administering distributions in accordance with the trust deed
• Beneficiaries: those who benefit from the trust, whether through income distributions, capital distributions, or an entitlement to the trust assets on a specified event
• Protector: sometimes appointed in offshore trusts; holds certain powers over the trustees but is not a trustee themselves

The trust deed sets out the purpose of the trust, the powers of the trustees, the class of beneficiaries, and the circumstances in which capital and income can be distributed.

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Bare Trusts

A bare trust (also called an absolute trust or simple trust) is the simplest form. The trustee holds assets for a named beneficiary who has an absolute, unconditional entitlement to the assets and any income they produce.

Key characteristics

• The beneficiary is entitled to demand the assets at any time once they are 18 (or 16 in Scotland)
• Income produced by the trust is taxed on the beneficiary, not the trust — HMRC treats the arrangement as transparent
• Capital gains are also taxed on the beneficiary
• No 10-year anniversary charges or exit charges apply (unlike discretionary trusts)

Common uses

• Holding assets for minor children: parents or grandparents can contribute funds or investments to a bare trust for a child under 18; the assets are legally held by the trustees but beneficially owned by the child. When the child turns 18, they have an unqualified right to the funds — this is the most significant practical limitation of the bare trust for those who want to retain some control beyond 18
• Alternative to JISA: bare trusts have no annual contribution limit (unlike the Junior ISA's £9,000 limit) and can hold a wider range of assets
• Conveyancing: used in property purchases where beneficial and legal ownership are held separately

Tax considerations

Because income and gains are taxed as the beneficiary's own, a bare trust for a minor child means the income is taxed at the child's marginal rate — which may be zero if the child has no other income and their share is within the personal allowance. However, if the settlor is a parent, HMRC applies the "parental settlement" rule: income over £100 per year from a parental gift is taxed on the parent, not the child, until the child reaches 18 or marries.

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Discretionary Trusts

The discretionary trust is the most flexible and most widely used trust structure for estate planning. The trustees have full discretion over how the trust fund is used: who among the beneficiaries receives income or capital, when, and in what amounts.

Key characteristics

• No individual beneficiary has a fixed entitlement; all are potential beneficiaries within a defined class (which can be broad: "my children and remoter issue and their spouses")
• Trustees make distributions in their discretion, guided by the settlor's letter of wishes (not legally binding but usually followed)
• Assets in a discretionary trust that are outside the settlor's estate avoid IHT — subject to the entry charge, anniversary charges, and the settlor surviving 7 years

IHT treatment

• On establishment: if the value settled exceeds the available NRB (£325,000 in 2026/27, after deducting any other chargeable transfers in the preceding 7 years), an immediate lifetime charge of 20% applies to the excess. Assets within the NRB can be settled with no entry charge
• 10-year anniversary charge: at each 10-year anniversary, 6% of the trust fund value above the available NRB is charged to IHT
• Exit charges: proportionate charges apply when assets are distributed from the trust between 10-year anniversaries

Income tax treatment

• The trust pays income tax at 45% on non-dividend income and 39.35% on dividend income (the trust tax rates apply above a de minimis of £1,000)
• When income is distributed to beneficiaries, it carries a 45% tax credit; beneficiaries can reclaim overpaid tax if their personal rate is lower (or pay additional tax if their rate is higher — though few recipients will be in a higher position than 45%)

Capital gains

• Gains within the trust are taxed at 24% (the rate on both residential property and other chargeable assets following the 30 October 2024 increase) if the gain exceeds the annual exemption available to trusts (one-half of the individual annual exemption, currently £1,500)
• Holdover relief is available on gifts out of a discretionary trust (allowing the gain to be deferred until the beneficiary disposes of the asset)

Common uses

• Estate planning within the NRB (typically £325,000 per settlor)
• Protecting assets for beneficiaries at risk of bankruptcy, divorce, or financial vulnerability
• Retaining flexibility over which family members benefit and when
• Cross-generational planning where the ultimate beneficiaries are not yet determined

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Interest in Possession Trusts

In an interest in possession (IIP) trust, one or more beneficiaries have the right to income as it arises in the trust — not a discretionary right, but a legal entitlement. The capital may be held for a different beneficiary (often a future generation).

Key characteristics

• The life tenant (income beneficiary) is entitled to all income as it arises
• The trustees must pay income to the life tenant; they cannot accumulate it without the beneficiary's consent
• On the death of the life tenant, the trust capital passes to the remaindermen (capital beneficiaries)

IHT treatment

• The value of the trust fund is included in the life tenant's estate for IHT purposes (as if they owned the assets outright)
• This applies to IIP trusts created on or after 22 March 2006; pre-2006 IIP trusts may have different treatment depending on their terms

Income tax treatment

• The life tenant is treated as receiving the trust income directly; it is included in their personal income tax calculation at their marginal rate
• The trust pays income tax at the basic rate (20%); additional tax is paid (or recovered) by the beneficiary through self-assessment

Common uses

• Surviving spouse trusts: a will might give a surviving spouse an interest in possession in the deceased's estate (receiving all income for life) with the capital passing to children on the surviving spouse's death. This structure satisfies the spouse's income needs while ultimately benefiting the next generation
• Life interest on first death: commonly used in will planning for couples with children from previous relationships, balancing the competing interests of the surviving spouse and the deceased's children

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Accumulation and Maintenance Trusts

Prior to 22 March 2006, Accumulation and Maintenance (A&M) trusts were widely used for trusts established for the benefit of children and grandchildren. They enjoyed favourable IHT treatment: no entry charge, no exit charges, and no 10-year anniversary charge, provided the capital would vest in beneficiaries by age 25.

The Finance Act 2006 substantially changed the landscape. From that date:

• New A&M trusts that did not meet strict qualifying conditions (capital vesting at 18, or the trust being qualifying for the purposes of Section 71 IHTA 1984) lost their special status
• Most were converted to discretionary trusts or IIP trusts by their trustees

A&M trusts created before March 2006 with qualifying terms may retain their favourable status. Trustees of such trusts should take specialist advice to confirm the ongoing position.

For new trusts established after 2006 for the benefit of children, the practical choice is between a bare trust (simple, transparent, but absolute entitlement at 18) and a discretionary trust (flexible, IHT periodic charges, but trustees retain control beyond 18).

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Charitable Trusts

A charitable trust must be established for charitable purposes (relief of poverty, education, religion, health, saving of lives, or other purposes that benefit the community). Benefits:

• Income tax exemption: income not taxable
• CGT exemption: gains not taxable
• IHT: gifts to charity are fully exempt from IHT; charitable bequests in wills reduce the value of the estate subject to IHT; if 10% or more of the net estate is left to charity, the IHT rate on the remaining estate is reduced from 40% to 36%

Charitable trusts must be registered with the Charity Commission if annual income exceeds £5,000. The trustees must act in accordance with charity law and the charitable purposes stated in the trust deed.

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Choosing the Right Structure

The right trust structure depends on:

• Who are the intended beneficiaries and when should they benefit? Fixed entitlement (bare trust or IIP) versus discretion (discretionary trust)
• What is the IHT objective? Entry charges, periodic charges, and exit charges all affect the long-term cost of the trust
• Is flexibility over capital essential? Discretionary trusts offer maximum flexibility; bare trusts have none (the beneficiary can demand assets at 18)
• What is the settlor's relationship to the assets? GROB rules, reservation of benefit, and related-party provisions affect whether the arrangement achieves its IHT purpose

Most HNW estate plans use a combination of structures — discretionary trusts within the nil-rate band, IIP trusts in wills for surviving spouses, and bare trusts for simpler holdings for younger family members.

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How Global Investments Can Help

Trust planning is a specialist area requiring coordinated legal, tax, and financial advice. The choice of trust structure, the assets settled, the trustees appointed, and the letter of wishes all have long-term consequences that are difficult to reverse.

Global Investments works alongside solicitors and tax advisers to help clients understand how trust structures fit within their overall wealth and estate plan. We can help model the tax costs of different structures, assess the investment implications of trust assets, and advise on the investment mandate appropriate for trust funds.

Trust law and IHT rules are complex and subject to change. This article reflects the position as at June 2026 and is provided for general information only. It does not constitute legal, tax, or financial advice. Always take qualified professional advice before establishing or modifying a trust.

To discuss how trusts might fit your planning, please contact our team.