Trusts in England & Wales: A Complete Guide for Families and Individuals

A trust is a legal arrangement where you transfer assets to a trustee to manage on behalf of someone else — the beneficiary. In England and Wales, trusts are used in wills and estate plans to protect money for children, reduce inheritance tax, and ensure assets reach the right people at the right time. This guide explains the main types of trust, when you need one, and how to set one up.

Jurisdiction Notice: This guide covers trusts in England and Wales. Scottish law differs — if you live in Scotland, seek independent legal guidance. GOV.UK provides further detail on how trusts are taxed in the UK.

What Is a Trust?

A trust is a legal arrangement where one person (the settlor) transfers assets to one or more people (the trustees) to hold and manage for the benefit of others (the beneficiaries).

Key roles in a trust:

• Settlor: Creates the trust and transfers the assets
• Trustee: Manages the assets according to the trust's terms
• Beneficiary: Receives benefits from the trust (income, capital, or both)

Why Use a Trust?

Trusts can serve many purposes, including:

Protecting minor children:

If a child inherits money before they are 18, a trust can ensure funds are managed responsibly until they are mature enough.

Managing family assets:

Trusts can provide ongoing financial support for family members, such as elderly parents or dependents with special needs.

Reducing inheritance tax:

Certain types of trusts can help minimise inheritance tax liability when structured properly.

Protecting assets:

Trusts can shield assets from creditors, divorce settlements, or poor financial decisions by beneficiaries.

Types of Trusts in England & Wales

There are several common types of trusts, each suited to different purposes:

1. Bare Trust

• The beneficiary has the absolute right to the assets at a specified age (often 18)
• Trustees simply hold the assets until the beneficiary is legally entitled
• Simple and transparent

Best for: Minor children or straightforward inheritance.

2. Discretionary Trust

• Trustees have flexibility to decide how and when to distribute funds
• Beneficiaries may receive income, capital, or both at the trustees' discretion
• Useful for protecting assets for vulnerable beneficiaries or for long-term estate planning

Best for: Families with multiple beneficiaries or complex needs.

3. Interest in Possession Trust

• A beneficiary has the right to receive income from the trust immediately
• Capital is held for another beneficiary (remainderman)
• Often used in family wills to provide for a surviving spouse while protecting capital for children

Best for: Couples who want to provide income for a spouse but protect the inheritance for children.

4. Life Interest Trust

• Similar to interest in possession
• Income goes to a beneficiary during their lifetime
• Capital passes to other beneficiaries after their death

Best for: Long-term financial planning across generations.

Trusts in Wills: How They Work in Practice

Most people encounter trusts not as standalone arrangements but as provisions written into a will. A will trust — sometimes called a testamentary trust — comes into existence only when the person who made the will dies. It is one of the most practical and widely used tools in estate planning for families in England and Wales.

The most common scenario is a parent leaving money or property for a child who is under 18. Because children cannot legally own assets outright in England and Wales until they reach 18, a trust is the mechanism that holds and manages those assets in the meantime. The trustees — named in the will — step in to manage the money responsibly until the child is old enough to receive it directly.

A will trust can also be used to protect assets for a surviving spouse while ensuring that, when they die, the remainder passes to children rather than a new partner or their family. This is particularly common in blended families.

Statutory Trusts vs Express Trusts

When someone dies without a will and leaves assets to children under 18, the law automatically creates what is called a statutory trust under the Administration of Estates Act 1925. The assets are held by the administrator of the estate until the child turns 18.

This sounds like a safety net — but it is a rigid one. The administrator has limited flexibility in how they manage the money, and the child receives everything outright at 18 with no conditions attached.

An express trust, written into a will or set up as a standalone arrangement, gives you far more control. You can specify:

• The age at which the beneficiary receives capital (commonly 21 or 25, rather than 18)
• How income from the trust is used in the meantime (for education, maintenance, or other purposes)
• What happens if the beneficiary dies before reaching the specified age
• Whether trustees can make payments at their discretion for specific needs

The difference between a statutory trust and a properly drafted express trust can be significant for families with substantial assets.

Discretionary Trusts and Inheritance Tax: The Key Considerations

Discretionary trusts are widely used as part of inheritance tax planning, but it is important to understand how they are taxed before proceeding.

Assets placed into a discretionary trust are treated as a chargeable lifetime transfer for IHT purposes. If the value exceeds the nil-rate band (currently £325,000), a 20% entry charge applies on the excess. In addition, the trust is subject to:

• A periodic charge of up to 6% every ten years on the value of trust assets above the nil-rate band
• An exit charge when assets leave the trust, proportionate to the time elapsed since the last periodic charge

These charges mean a discretionary trust is not always the most tax-efficient vehicle for smaller estates. For larger estates, however, the long-term IHT savings — particularly when assets appreciate significantly over time — can substantially outweigh the periodic charges.

Trusts for Vulnerable Beneficiaries

If you have a child or family member with a disability, mental health condition, or other vulnerability that affects their ability to manage money, a trust provides a level of protection that outright inheritance cannot.

A disabled person's trust (also called a vulnerable beneficiary trust) receives favourable tax treatment in England and Wales, provided the beneficiary meets the legal definition of a disabled person under the Finance Act 2005. These trusts are subject to income tax and capital gains tax as if the assets belonged to the beneficiary directly — a significantly lower tax burden than a standard discretionary trust.

The trustees manage and apply the funds for the beneficiary's benefit throughout their lifetime, without the beneficiary being directly exposed to the risk of mismanaging the money.

How Long Can a Trust Last?

In England and Wales, a trust can last for a maximum of 125 years under the Perpetuities and Accumulations Act 2009. Most family trusts are wound up much sooner — typically when the youngest beneficiary reaches adulthood or when the trust's purpose has been fulfilled.

It is important to plan for what happens when the trust ends. The trust deed should clearly specify the final distribution — who receives the remaining capital and in what proportions — to avoid uncertainty or disputes between beneficiaries and trustees.

Common Mistakes When Setting Up a Trust

Even well-intentioned trusts can fail if they are drafted carelessly. The most common errors include:

• Naming a sole trustee — if that person dies or loses capacity, administering the trust becomes complicated. Always appoint at least two trustees, or a trust corporation.
• Vague drafting — if the trust deed does not clearly specify the trustees' powers and the beneficiaries' entitlements, disputes are likely. Ambiguity is costly to resolve.
• Ignoring tax consequences — some families set up trusts without understanding the entry charges, periodic charges, or income tax implications. Professional advice before settling assets into a trust is essential.
• Failing to fund the trust — a trust deed without assets transferred into it achieves nothing. Assets must be formally transferred to the trustees.
• Not reviewing the trust — family circumstances change. A trust set up when children are young may need to be reviewed as they approach adulthood or as the tax rules change.

Setting Up a Trust

To set up a trust, you generally need:

1. Clear objectives: Decide why you are creating the trust and who it benefits
2. Trust deed or will clause: Legal documentation specifying the terms
3. Appoint trustees: Choose people or professionals who are responsible, trustworthy, and capable
4. Transfer assets: Move property, money, or investments into the trust

Professional legal advice is strongly recommended, as errors in trust creation can have serious consequences.

Tax Implications of Trusts

Trusts can have complex tax rules in England & Wales, including:

• Income tax: Trustees may pay tax on income generated by trust assets
• Capital gains tax: Gains made by the trust may be taxed differently than individual gains
• Inheritance tax: Some trusts reduce inheritance tax, but others may trigger charges

Careful planning is essential to ensure your trust achieves its intended tax and estate planning benefits.

Reviewing and Managing Trusts

Trusts are not "set and forget." Regular reviews ensure:

• Trustees are acting in line with the trust deed
• Beneficiaries' needs are being met
• Tax obligations are managed properly

Final Thoughts: Why Trusts Are Important

Trusts are flexible tools that can protect your family, secure your children's inheritance, and provide tax planning benefits. Whether you are planning a will, arranging for minor children, or managing assets for future generations, a properly structured trust can offer security, clarity, and peace of mind.

If you die without a will, your assets will be distributed according to intestacy rules — which may not reflect your wishes. Creating a will with appropriate trust provisions ensures your family is protected.

Professional advice is essential to ensure the trust is legally valid, tax-efficient, and tailored to your family's needs.

*This guide is for informational purposes only and does not constitute legal advice. Laws relating to trusts in England and Wales are subject to change. Always seek independent legal guidance for your specific circumstances.*

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