4.5 Trusts: Structure, Purpose and Types

Trusts are a foundational estate-planning tool. CeMAP advisers must be able to explain the structure, identify the main types, and understand how trusts interact with UK tax and the advice process.

Trust Structure

A trust is an arrangement where one person (the settlor) transfers assets to another (the trustee) to hold for the benefit of one or more beneficiaries, or for a permitted purpose. The key elements are:

• Settlor — the person who creates the trust and provides the trust property.
• Trustee — the legal owner of the trust property, holding it on the terms set out in the trust deed. Trustees owe fiduciary duties to the beneficiaries.
• Beneficiary — the person with a beneficial (equitable) interest under the trust.
• Trust property — the assets held within the trust (cash, land, shares, life policies, etc.).
• Trust deed — the document (sometimes a declaration of trust) setting out the trustees' powers and the beneficiaries' entitlements.

The split between legal ownership (trustees) and beneficial ownership (beneficiaries) is the defining feature of an English-law trust.

Purpose of Trusts

Trusts are used to:

• Hold assets for minors who cannot legally own property in their own right.
• Provide for vulnerable beneficiaries without giving them outright control.
• Control the timing of inheritance (e.g. age 25).
• Reduce inheritance tax exposure by removing assets from the settlor's estate.
• Hold life insurance policies outside the estate so the payout does not form part of the estate for IHT.
• Provide for a spouse during their lifetime while preserving capital for children of an earlier relationship.
• Manage charitable or purpose-driven giving.

Main Types of Trust

Bare Trust

A bare trust (also called a simple trust) is the simplest form.

• The beneficiary is absolutely entitled to the trust property and any income.
• The trustee's role is essentially custodial: they hold legal title until the beneficiary reaches 18 (in England & Wales) or comes of age.
• Common for Junior ISAs, child savings accounts, and gifts to minor grandchildren.

Interest in Possession Trust

In an interest in possession (IIP) trust, a beneficiary (the life tenant) has a current right to receive income from the trust property for a period (often their lifetime).

• The life tenant does not own the capital, but is entitled to the income as it arises.
• On the life tenant's death, the capital passes to remaindermen named in the trust.
• Common in wills where the deceased leaves a life interest to a spouse and the capital to children.

Discretionary Trust

In a discretionary trust, the trustees have discretion over which beneficiaries receive income or capital, how much, and when.

• Beneficiaries have only a hope of benefit, not an entitlement.
• Suitable where beneficiaries may be unsuitable to manage money, or where future needs are uncertain.
• Often used for vulnerable or spendthrift beneficiaries, disabled beneficiaries, and tax planning.

Accumulation Trust

An accumulation trust allows trustees to either distribute income to beneficiaries or accumulate it (add it to capital).

• Often combined with discretionary features (accumulation and maintenance trusts, historically).
• Powers to accumulate are limited by the Law of Property Act 1925.

Life Interest Trust

A life interest trust gives a beneficiary an interest in possession for life, often in a residential property. A common variant is the right to reside trust, which gives the beneficiary the right to live in a property without owning it.

Mixed and Hybrid Trusts

Trusts can combine features — for example, an interest in possession for a surviving spouse during their lifetime, then discretionary for children after death.

UK Tax Treatment (Overview)

Trusts are subject to a distinct tax regime. The regime is complex; this overview covers the principles.

Income Tax

• Bare trusts: income is treated as the beneficiary's and taxed at their marginal rates.
• Interest in possession trusts: income is taxed at the trust rate (currently 45%) on the trustees, with the life tenant receiving a credit and reclaiming any overpayment through self-assessment.
• Discretionary trusts: income within the standard rate band (currently £1,000) is taxed at lower rates (20% income / 10% dividends); above that, the trust rate of 45% (39.35% for dividend income) applies.

Inheritance Tax (IHT)

• Bare and IIP trusts created during lifetime: gifts into the trust are chargeable lifetime transfers (CLTs) if above the NRB; CLTs above the NRB trigger an immediate 20% charge.
• Discretionary trusts: CLT regime on entry, plus ten-year anniversary charges and exit charges — the principal reason these are sometimes called "relevant property trusts."
• Will trusts: most gifts by will are exempt transfers if made to a spouse or charity; an IIP trust for a surviving spouse qualifies for spouse exemption on first death.

Capital Gains Tax (CGT)

• Trustees have an annual exemption (currently half the individual amount — £1,500 for 2026/27).
• Transfers into trust are disposals for CGT but are usually held over so no immediate charge arises.
• Disposals by trustees are charged at the trust rate of 24% for residential property and 24% for other assets (per 2026/27 rates).

Trusts in Financial Planning

Trusts commonly wrap:

• Life insurance policies — written in trust so the payout reaches beneficiaries quickly and outside the estate.
• Pension death benefits — the pension scheme administrator retains discretion under a nomination/expression of wish form, mimicking a discretionary trust.
• Investment bonds — for tax-deferred growth and control over timing of chargeable event gains.
• Estate planning for business property — business property relief can be combined with trusts to pass on trading businesses free of IHT.

Advisers should remind clients that:

• Trusts are not always tax-positive — advice should compare the trust route with outright ownership.
• Trustees must understand their duties and submit tax returns.
• Beneficiaries' entitlements vary by trust type, and changing circumstances may require a deed of variation or court-approved variation under the Variation of Trusts Act 1958.