The ultimate mini guide to Trusts

6

May

2025

There are many different types of Trusts, each providing a solution to match the short and long term needs of a trustee, as Tracy Creed, partner and head of our Private Client team explains.

What is a trust?

A trust is defined* as a way of managing assets – namely money, investments, land or buildings - for a person or people.

Trusts involve the 'settlor' - the person who puts assets into a trust - and the 'trustee' - the person who manages the trust. In the UK, the majority of Trusts need to be registered with the Trust Registration Service (TRS).

What types of trust are there?

The many different types of trust include discretionary, life interest, vulnerable persons, accumulation and maintenance, pilot, personal injury, and trusts per autre vie. Most trusts, including these, are express trusts, which means a trust created deliberately by a settlor, usually, but not always, in the form of a document such as a written deed or declaration of trust.

There are also non express trusts such as resulting, implied and constructive trusts. Trusts that are not express trusts are not required to be registered with the TRS as registrable express trusts, but may have to be registered for taxable purposes if they have a UK tax liability.

What are the most common types of trust?

1. Life interest trusts (also known as “interest in possession” trusts or where created under the terms of a will “immediate post death interest” trusts).

These involve an individual being given the right to the income or benefit derived from an asset or assets, with the capital of the asset ultimately passing to someone else. For example, this may be an individual being allowed to occupy a property, or receive the dividends from a shareholding.

2. Discretionary trusts

These involve trustees being provided with assets that they hold for a defined set or class of beneficiaries. The trustees can decide which of the beneficiaries, if any, they give assets to, and whether they will give them income or capital, or a combination of the two. Trustees can choose to divide assets between beneficiaries or give all assets to one beneficiary. What is important is that none of the beneficiaries have an entitlement to anything from the trust until the trustees exercise their discretion and elect to give them something.

3. Vulnerable persons trust (VPT)

Also known as ‘disabled persons trust’, this is given a particular tax treatment when it is for the primary reason and benefit of someone who is classified as “vulnerable”. To qualify, the principal beneficiary must be disabled within the meaning set out in Schedule 1a of the Finance Act 2005.

The VPT is useful to ensure funds are made available for the lifetime of the vulnerable person, for example, to purchase a property for the vulnerable person to live in, pay for holidays or respite stays for the vulnerable person, or purchase adapted vehicles.

A VPT is taxed on the same rates applicable to the vulnerable person themself. On the death of the vulnerable person, the value of the trust aggregates with their estate for Inheritance Tax (IHT). Provided an election is made to HMRC, the trust’s income and capital gains can be assessed at the rates applicable to the vulnerable person.

A VPT often takes the form of either a life interest trust or discretionary trust. To qualify as a VPT, the trust assets must only (subject to a de minimis) be available for the benefit of the vulnerable person during their lifetime. Therefore, if the discretionary trust is chosen, the discretions are only available, (subject to the de minimis) to benefit others after the death of the vulnerable person.

If created in a lifetime, the gift used to create the trust is defined as a potentially exempt transfer for IHT purposes. If the gift donor survives making the gift by seven years, there is no further IHT to pay. If the donor does not survive the seven years, the value of the gift aggregates with the donor’s estate for IHT purposes, and taper relief may apply. If a gift is made to the value of the nil rate band (or more) and the donor dies within seven years, then the value of the IHT due on the gift will be reduced (tapered) after four years from the date of the gift.

What tax regime is applicable to trusts?

The tax regime will depend on how the trust is created, and so it is important to discuss the right trust for you and your trustee with your solicitor, who can explain the relevant tax regimes and liabilities. Whether tax benefits can be achieved depends on the specific and individual circumstances and should be considered as part of a wider estate planning review.

Trusts and asset protection

Setting up and maintaining trusts isn’t only about tax and tax benefits. It is not unusual for people to create a trust to protect or ring-fence assets.

For example, a parent could be concerned about a spendthrift child or grandchild and want trustees to have the option to release funds only when they think appropriate, and in a protected and controlled way. Or a parent could be concerned about a child or grandchild’s addiction, and a trust can provide a safe structure within which the trustees can provide for the beneficiary in a specific way or for a specific purchase.