Why Trust Type Matters
Not all trusts are the same. English law recognises several distinct categories of trust, each with different characteristics, different taxation rules, and different planning applications. Choosing the right type of trust for your circumstances is as important as deciding to use a trust at all.
The three types most frequently encountered in UK estate and wealth planning are:
- Discretionary trusts — where the trustees decide who benefits, when, and how much
- Bare trusts — where the beneficiary has an immediate, absolute entitlement to the assets
- Interest in possession trusts (IIPs) — where a named beneficiary has the right to income, with capital passing to others in due course
Each has a distinct legal structure, and each is taxed differently for income tax, capital gains tax, and inheritance tax purposes. This guide sets out the key features, tax treatment, and typical uses of each type, with all figures and rules as of 2026.
1. Discretionary Trusts
How They Work
In a discretionary trust, the trustees hold assets for a defined class of beneficiaries — for example, "the children and remoter issue of the settlor" — but no individual beneficiary has any fixed entitlement. The trustees use their discretion to decide: who receives income or capital, in what amounts, and when. A letter of wishes from the settlor guides (but does not legally bind) the trustees.
The flexibility of the discretionary trust is its defining feature. Trustees can respond to changing circumstances — a beneficiary who becomes bankrupt, a relationship breakdown, a change in tax law — without amending the trust deed. Distributions can be deferred until a beneficiary is mature enough to handle wealth, or made earlier in cases of need.
Discretionary trusts are the most commonly used trust type for HNW estate planning, both onshore and offshore.
Income Tax
The trust pays income tax on income it retains at the trust rate: 45% on non-dividend income, 39.35% on dividend income (as of 2026). A standard rate band of £1,000 applies to the first £1,000 of income (taxed at 20%/8.75% for dividends), but this is shared among all discretionary trusts made by the same settlor — so a settlor who creates multiple trusts cannot multiply the allowance.
When income is distributed to a beneficiary, the beneficiary receives a tax credit equal to the 45% already paid by the trust. Beneficiaries who are non- or basic-rate taxpayers can reclaim part of this tax. Higher and additional rate taxpayers have no further liability.
Capital Gains Tax
The trust pays CGT at 24% on all gains, whether from residential property or other assets (the trustee rate rose to a flat 24% for disposals on or after 30 October 2024; 2026/27 rate). The trust's annual exempt amount is £1,500 (half the individual amount of £3,000), shared among all trusts made by the same settlor on the same day.
On distribution of assets in kind to a beneficiary, a hold-over election (under s.260 TCGA 1992 for discretionary trusts) can be made, deferring the gain until the beneficiary disposes of the asset.
Inheritance Tax — The Relevant Property Regime
UK discretionary trusts are subject to the "relevant property regime" — a standalone IHT framework:
- Entry charge: When assets enter the trust, if the settlor's cumulative total above the nil-rate band (£325,000) is exceeded, a 20% charge applies (equivalent to half the death rate).
- Ten-year anniversary charge: Every ten years, the trust value above the nil-rate band is charged at a maximum of 6%.
- Exit charge: When capital leaves the trust (is distributed to a beneficiary or otherwise leaves), a proportional charge applies based on the time since the last ten-year anniversary.
The nil-rate band available to the trust depends on the settlor's cumulative chargeable transfers in the seven years before settlement.
For offshore (excluded property) trusts settled by non-UK domiciliaries, the relevant property regime does not apply to non-UK assets — a major planning benefit.
Typical Uses
- Long-term family wealth holding
- Excluded property trusts for non-UK domiciliaries
- Pilot trusts to preserve multiple nil-rate bands
- School fees planning (historically; less tax-efficient post-2006 reforms)
- Asset protection structures
- Charitable purposes alongside non-charitable beneficiaries
2. Bare Trusts
How They Work
A bare trust (also called an absolute trust) is the simplest form of trust. The trustee holds assets on behalf of a beneficiary who has an immediate, unconditional, and absolute right to both the income and capital. The trustee has no discretion — they must give the assets to the beneficiary on demand once the beneficiary is of legal age (18 in England and Wales).
A bare trust cannot be revoked and the beneficiary cannot be changed. The beneficiary's entitlement is fixed from the outset.
The most common use in family planning is to hold assets for minor children: a parent contributes funds; the trustee (often a parent or grandparent) holds until the child reaches 18; at that point the child can demand the assets outright. The bare trust also appears frequently in pension planning (nominee accounts held for the investor) and as the standard structure for nominee shareholdings.
Income Tax
Because the beneficiary has an absolute entitlement, HMRC treats the beneficiary as the true owner of the assets for income tax purposes. The trust's income is treated as the beneficiary's income. This has a critical implication for parental gifts: if a parent funds a bare trust for a minor unmarried child and that child's income from the trust exceeds £100 per year, the income is taxed as the parent's income under the parental settlement rules (s.629 ITTOIA 2005). This anti-avoidance rule catches most parent-to-child bare trust income. Gifts from grandparents, however, are not affected.
Capital Gains Tax
Again, the beneficiary is treated as the owner. Gains are attributed to the beneficiary and taxed at the beneficiary's personal CGT rates (18% or 24% on all assets — both residential property and other assets — depending on whether the gain falls within the basic or higher-rate band, following the alignment of non-residential rates with residential rates on 30 October 2024). The beneficiary uses their personal annual exempt amount (£3,000 in 2026/27).
When the bare trust is "collapsed" — i.e., assets transferred to the beneficiary — there is no disposal for CGT purposes as the beneficiary was already the beneficial owner.
Inheritance Tax
Assets in a bare trust are treated as belonging to the beneficiary for IHT purposes. If the beneficiary dies, the assets form part of their estate. There is no relevant property regime entry charge, ten-year charge, or exit charge.
Where the settlor is also the beneficiary (for instance, a nominee account), assets remain in the settlor's estate.
Typical Uses
- Holding assets for minors until they reach adulthood
- Nominee accounts and CREST settlements
- Junior ISAs held through nominees
- Simple gifting structures where the donor is comfortable with an irrevocable transfer
Key Limitation
The major limitation of a bare trust is inflexibility: the beneficiary cannot be changed. Once created, the trust cannot be redirected to a different beneficiary if circumstances change. And when the beneficiary turns 18, they have an absolute right to demand the assets — regardless of whether the trustees (or parents) consider them ready.
3. Interest in Possession Trusts
How They Work
An interest in possession (IIP) trust gives a named beneficiary (the "life tenant" or "income beneficiary") the right to the income of the trust during their lifetime. The capital is held for other beneficiaries (the "remaindermen" — often children) who receive it when the life interest ends (typically on the income beneficiary's death).
Example: A testator leaves their estate to trustees on trust to pay the income to their surviving spouse for life, with the capital to be held for the children on the spouse's death. The spouse has an IIP; the children are the remaindermen. This "life interest trust" or "will trust" is one of the most frequently used structures in estate planning for second-marriage families or families wanting to balance spousal provision with children's inheritance.
IIPs can also be created during the settlor's lifetime (inter vivos IIPs), though the tax treatment for lifetime IIPs differs from those arising under a will.
Income Tax
The trust pays income tax at the basic rate (20%) on income. The income beneficiary receives the net income and, if they are a higher or additional rate taxpayer, must pay the additional tax through self-assessment. If they are a non- or starting-rate taxpayer, they may reclaim tax. Trust expenses relating to the income are set against income before distribution.
Capital Gains Tax
The trust pays CGT at a flat 24% on all gains (residential property and other assets alike, following the increase in the trustee rate on 30 October 2024). The trust has an annual exempt amount of £1,500 (shared if same settlor, same day). On a transfer of assets to the remaindermen on termination of the IIP, a hold-over election (under s.260 TCGA 1992) is available.
When the life tenant dies, the assets are treated for CGT as remaining in the trust — no deemed disposal occurs. The trust's base cost is uplifted to probate value on the life tenant's death (the "free uplift").
Inheritance Tax — A Critical Distinction
The IHT treatment of IIPs changed fundamentally in 2006. The distinction between trusts created before and after 22 March 2006 remains critical:
Pre-22 March 2006 IIPs (or IIPs arising under a will or intestacy at any time, or those qualifying as "transitional serial interests"): The life tenant is treated as owning the trust assets for IHT purposes. The trust is not subject to the relevant property regime. On the life tenant's death, the trust assets form part of the life tenant's estate and are subject to IHT at 40% (above available exemptions).
Post-22 March 2006 lifetime IIPs (those created during the settlor's lifetime after 22 March 2006): Unless they qualify as an IPDI (Immediate Post-Death Interest), Bereaved Minor's Trust, Disabled Person's Trust, or transitional serial interest, they are treated as relevant property trusts, with entry charges, ten-year charges, and exit charges.
In practice, this means that most modern lifetime IIPs created since 2006 fall into the relevant property regime — reducing their attractiveness for lifetime tax planning compared to the position before 2006.
Will trusts and IPDIs remain outside the relevant property regime. A life interest arising under a will (an Immediate Post-Death Interest) causes the trust assets to be treated as part of the life tenant's estate for IHT — so the surviving spouse can benefit from the spouse exemption if they are the life tenant.
Typical Uses
- Surviving spouse life interest trusts (will trusts / IPDIs) — balancing provision for a surviving spouse with ultimate inheritance by children
- Nil-rate band discretionary will trusts followed by an IIP for the surviving spouse
- Disabled person's trusts (which retain favourable IIP treatment post-2006)
- Bereaved minor's trusts
Choosing the Right Trust: A Summary
| Discretionary | Bare | Interest in Possession (post-2006 lifetime) | IIP (Will trust / IPDI) | |
|---|---|---|---|---|
| Flexibility | High — trustees choose | None — beneficiary has fixed right | Medium | Medium |
| IHT regime | Relevant property | Beneficiary's estate | Relevant property | Beneficiary's estate |
| Income tax | 45% trust rate; credit on distribution | Beneficiary's rate | 20% trust rate | 20% trust rate |
| CGT | 24% trust rate (all assets) | Beneficiary's rate | 24% trust rate (all assets) | 24% trust rate (all assets) |
| Typical use | Estate planning, asset protection | Minors, nominees | Limited (since 2006) | Spouse/family provision in wills |
How Global Investments Can Help
Selecting the right trust structure — and ensuring it is set up correctly from both a legal and tax perspective — requires careful advice. Global Investments works with specialist trust lawyers and tax advisers to help internationally mobile HNW families design trust arrangements that are appropriate for their specific circumstances, jurisdictions, and long-term goals.
We can review your existing trusts, identify potential issues or inefficiencies, and coordinate with trustees and legal advisers to implement changes where appropriate.
Contact us for a confidential discussion about your estate planning arrangements.
This guide is for general information only and does not constitute legal or tax advice. Trust taxation is complex and subject to frequent change. Rates and thresholds shown are for the 2026/27 tax year. Always seek qualified professional advice before making any decisions. As of 2026.
This guide is for general information only and does not constitute financial advice or a personal recommendation. The value of investments can fall as well as rise and you may get back less than you invest. Tax rules, pension legislation, and investment regulations change — always verify current rules and seek advice from a qualified independent financial adviser before making any financial decisions.