If you’ve worked hard all your life, the last thing you want is to see your savings swallowed by care home fees or a hefty inheritance tax bill. Trust funds UK solutions are one of the most powerful — yet least understood — tools available to families over 55. Think of a trust as a legal safety net: you transfer ownership of assets to trusted people who manage them on behalf of your loved ones, exactly as you intended.
In this guide, written in plain English by a former mortgage and consumer finance specialist, we walk you through everything you need to know about trust funds UK: what a trust is, the four main types, how they can reduce your inheritance tax bill, protect your home from local authority means-testing, and the practical steps to get one set up with the right solicitor.
| ℹ️ Key Facts — Trust Funds UK at a Glance • The IHT nil-rate band is £325,000 per person for 2026/27 — frozen until at least April 2031 • IHT is charged at 40% on estates above that threshold • Residential nil-rate band adds up to £175,000 per person where a home passes to direct descendants • Discretionary trusts face a 10-year periodic IHT charge of up to 6% on assets above £325,000 • Assets placed in trust must be registered with HMRC’s Trust Registration Service within 90 days • Average residential care home fees: £1,200–£1,500 per week (higher in London and the South) |
What Is a Trust Fund in the UK?
A trust fund is a legal arrangement, not a separate legal entity, where a person (the settlor) transfers assets to a group of people (the trustees) who hold and manage those assets for the benefit of named beneficiaries. The key point is that legal ownership and beneficial ownership are separated: the trustees own the asset on paper, but they must use it solely for the beneficiaries’ benefit.
Trusts are not just for the wealthy. A grandparent holding £10,000 in a savings account for a grandchild until they turn 18 is technically a bare trust. At the other end of the scale, a family might place their home and investment portfolio into a discretionary trust to manage IHT and protect assets from a care home means test. Whatever the value, the fundamental three-party structure of trust funds UK arrangements remains the same: settlor, trustee, beneficiary. For the full HMRC breakdown, see GOV.UK’s guide to types of trust.
The Law Society describes trusts as arrangements where “the trustees look after [assets] until the beneficiary is old enough” or until certain conditions are met — a definition that captures their core purpose: control, protection, and certainty.
| Q: What is the difference between a trust and a will? A: A will only takes effect on death, and assets go through probate before reaching beneficiaries (often 6–12 months). A trust can be set up during your lifetime and transfers assets immediately to trustees, bypassing probate, avoiding delays and keeping the matter private. |
The Four Main Types of Trust Fund in the UK
Understanding which type of trust suits your situation is the starting point for any meaningful estate planning. Here are the four main types used by UK families.
1. Bare Trust
A bare trust (also called an absolute trust) is the simplest form. The beneficiary has an immediate, absolute right to both the income and the underlying assets. Trustees hold the assets in name only — they have no power to decide who benefits or when.
Bare trusts are commonly used to hold assets for children or grandchildren until they reach 18 (or 16 in Scotland). Once the beneficiary reaches the relevant age, they can demand the assets outright. Because the beneficiary is treated as the owner for tax purposes, any income is taxed at the beneficiary’s personal rate — which is often lower than the settlor’s.
| ✅ Best for: Grandparents saving for grandchildren’s education or first home deposit Simple asset transfers where flexibility is not required Situations where the beneficiary will shortly be old enough to manage the asset themselves |
2. Discretionary Trust
A discretionary trust gives the trustees wide powers to decide who receives what, when, and how much. No individual beneficiary has a fixed entitlement — instead, there is a defined “class” of potential beneficiaries (for example, “my children and grandchildren”) from whom the trustees select.
This flexibility makes discretionary trusts extremely useful for IHT planning and care fee protection. Because assets are not owned by any one beneficiary, they are generally excluded from individual estates for means-testing purposes. However, trustees pay income tax at 45% on non-savings income above the £1,000 standard rate band, and most discretionary trusts are subject to a 10-year periodic IHT charge of up to 6% on assets above the nil-rate band (£325,000 in 2026/27).
| ⚠️ Important — IHT on Entry Transferring assets into a discretionary trust counts as a “chargeable lifetime transfer.” If the value placed into trust exceeds your available nil-rate band (£325,000), HMRC charges IHT at 20% on the excess at the point of transfer. A married couple can each use their own nil-rate band, potentially sheltering up to £650,000 without an immediate charge. |
| ✅ Best for: Families with complex needs or beneficiaries whose circumstances may change IHT planning where flexibility between beneficiaries is required Protecting assets from a beneficiary’s divorce, bankruptcy, or creditors Couples concerned about care home means-testing for the surviving spouse |
3. Interest in Possession (Life Interest) Trust
An interest in possession trust (also called a life interest trust) gives a named beneficiary — typically a spouse or civil partner — the right to income from, or use of, the trust assets for the rest of their life. On their death, the capital passes to the “remainderment” beneficiaries — usually children from the settlor’s marriage.
This structure is particularly popular in blended families and with couples who want to protect children from a first marriage while still providing for a surviving spouse. A classic example: a widow is given the right to live in the family home under a life interest trust. When she dies, the property passes directly to the settlor’s children, rather than the widow’s estate.
| ✅ Best for: Blended families wanting to protect children from a first marriage (“sideways disinheritance” prevention) Couples wanting the surviving spouse to have security while preserving capital for children Property held on trust where the life tenant lives in the home |
4. Will Trust
A will trust is not a distinct trust type in its own right — it refers to any trust created under the terms of a will that only comes into existence on the settlor’s death. It could be a bare trust, discretionary trust, or life interest trust, depending on how the will is drafted.
Will trusts are a flexible way to control what happens to your estate after you die without any immediate tax consequences, since assets remain in your estate until death. If you have complex wishes — for instance, leaving assets to a disabled child who must not lose means-tested benefits, or protecting a vulnerable beneficiary from their own poor financial decisions — a will trust is often the most cost-effective and flexible solution.
For more on what happens when no trust or valid will is in place, see our article on 7 Shocking Things That Happen When You Die Without a Will in the UK.
Quick Comparison: The Four Main Trust Types
| Trust Type | Key Characteristics |
| Bare Trust | Beneficiary has absolute right to assets and income. Simple. No flexibility. Taxed at beneficiary’s rate. |
| Discretionary Trust | Trustees choose who benefits, when and how much. Flexible. Subject to trust income tax rates and 10-year IHT charge. |
| Interest in Possession | Named beneficiary gets income/use for life. Capital preserved for remaindermen. Popular in blended families. |
| Will Trust | Created on death via will. No immediate tax consequence. Can be any of the above types. |
How Trust Funds UK Can Reduce Inheritance Tax
Inheritance tax (IHT) is charged at 40% on the part of your estate that exceeds the nil-rate band of £325,000. With the residence nil-rate band (£175,000 per person where a home passes to direct descendants), a married couple can pass up to £1 million free of IHT. Above that, however, the 40% charge can be significant — and with IHT receipts forecast at £8.7 billion in 2025/26, more ordinary families are affected every year. For a plain-English overview of IHT, see MoneyHelper’s inheritance tax guidance.
Placing assets into trust funds UK structures can reduce the size of your taxable estate, but it is not a simple “switch off” for IHT. Here is how it works in practice:
- Assets transferred into a discretionary trust count as a chargeable lifetime transfer. If the total exceeds your nil-rate band (£325,000), HMRC charges 20% on the excess immediately.
- After 7 years, those assets are generally removed from your estate for IHT purposes, provided the trust is not ‘settlor-interested’ (i.e. you cannot benefit from the trust yourself).
- Discretionary trusts are subject to a 10-year periodic charge of up to 6% on assets exceeding the nil-rate band, and an exit charge when assets leave the trust.
- A nil-rate band discretionary trust (NRBDT) in a will can still be useful for protecting assets from care fees and from sideways disinheritance, even if the primary IHT benefit was reduced by the introduction of transferable nil-rate bands in 2007.
- From April 2027, inherited pensions will also become liable for IHT, making trust funds UK planning more urgent for those with significant pension wealth. Read our full guide: Pension Inheritance Tax 2027: The Bombshell That Could Hit Your Family.
| 💡 Tip — The Gift with Reservation Trap If you transfer your home into a trust but continue to live in it, HMRC treats this as a “gift with reservation of benefit” (GROB). The property remains in your estate for IHT as if the transfer had never happened. To avoid this, you must either pay a market rent to the trust or use a life interest trust that correctly records your right to occupy. Always take specialist advice before transferring property. |
| Q: Does a trust automatically remove assets from my estate for inheritance tax? A: No. Assets placed into a discretionary trust are removed from your estate for IHT only after 7 years, and only if the trust is not settlor-interested. An immediate 20% charge applies on amounts transferred above the nil-rate band (£325,000). A bare trust does not remove assets from the estate at all, as the beneficiary’s interest is counted as part of their estate. |
Can a Trust Protect Assets from Care Home Fees?
Care home fees in the UK are means-tested. If your savings and assets exceed £23,250 in England (the lower capital limit), you are expected to fund your own care. With residential care averaging £1,200–£1,500 per week, a three-year stay could cost £187,000–£234,000 — enough to force the sale of a family home.
Assets held in certain types of trust may not be included in the local authority’s financial assessment, because the trust owns the assets rather than you personally. However, there is an important legal trap that catches many families out:
| ⚠️ Warning — Deliberate Deprivation of Assets If a local authority believes you transferred assets into a trust primarily to avoid care home fees, it has the power to treat those assets as still belonging to you for means-testing purposes — even if the trust is legally valid. This is known as “deliberate deprivation of assets.” To withstand scrutiny, a trust must be set up for multiple legitimate reasons (IHT planning, protecting children’s inheritance, family protection) — not care fee avoidance alone. The earlier you set up a trust, the stronger your position. Age UK describes some care-home avoidance trust schemes as “a worthless piece of paper” — specialist legal advice is essential when exploring trust funds UK arrangements for care fee planning. |
A well-drafted nil-rate band discretionary trust set up in a will is generally the safest of all trust funds UK options for care fee planning, because assets remain in your estate until death — at which point the means test no longer applies. The trust then protects the surviving spouse’s inheritance from being assessed in their own care fee means test.
For related reading, see our guide on Common Law Partner Rights UK — particularly relevant if you and your partner are not married, as trusts can provide protections that the law otherwise does not automatically grant.
| Q: Can I put my house in a trust to avoid care home fees? A: Potentially, but it is not straightforward. If you transfer your home into a discretionary trust during your lifetime and later need care, the local authority may still assess the property as yours if they believe the transfer was made to avoid fees. The safest approach is to set up a trust well in advance, with multiple legitimate reasons documented, and with the guidance of a specialist estate planning solicitor. |
How to Set Up a Trust Fund in the UK: Step by Step
Setting up trust funds UK arrangements is not a DIY job. Trust law is a specialist area, and a poorly drafted deed can be challenged by HMRC, the local authority, or family members. Here is what the process looks like with a reputable solicitor.
- Choose the right type of trust for your objectives. Discretionary for flexibility; life interest for blended family protection; bare trust for simple asset holding.
- Select your trustees. You need at least one trustee (you can be a trustee of your own trust), but two is better for flexibility. Professional trustees — solicitors or trust companies — charge ongoing fees but provide expertise and continuity.
- Draft the trust deed. This is the legal document governing everything: what assets are held, who the beneficiaries are, and what powers the trustees have. A standard deed for a single property costs £1,500–£2,000 + VAT; more complex arrangements can run to £3,000–£5,000 + VAT.
- Transfer the assets. For property, a TR1 form transfers legal title at HM Land Registry. For investments, share certificates or bank accounts are re-titled in the trustees’ names.
- Register with HMRC’s Trust Registration Service (TRS). Most trust funds UK arrangements must register within 90 days of creation, regardless of whether they have a UK tax liability. Failure to register can result in a penalty of up to £5,000. The TRS itself is free; professional fees for registration typically range from £150–£500.
- Write a Letter of Wishes. Not legally binding, but sets out (privately) how you would like the trustees to exercise their discretion. This is especially important for discretionary trusts.
- Set up ongoing administration. Discretionary trusts require annual tax returns if the trust has income. Diary reminders should be set for the 10-year anniversary IHT charge.
| ✅ Checklist — Before You Sign Anything ☐ Take advice from a specialist estate planning solicitor, not a general high-street firm ☐ Understand the immediate IHT consequences of transferring assets above £325,000 ☐ Check whether placing property in trust affects your residence nil-rate band eligibility ☐ Document multiple legitimate reasons for the trust (not just care fee planning) ☐ Ensure the trust deed reflects the Trustee Act 2000 duty of care obligations ☐ Register the trust with HMRC within 90 days via the Trust Registration Service ☐ Write a Letter of Wishes alongside the trust deed |
What About Tax Inside a Trust?
Tax within a trust can be complex. Here is a plain-English summary for each main tax:
Income Tax
Within trust funds UK discretionary structures, income tax is charged at 45% on non-savings income and 39.35% on dividends for income above the £1,000 standard rate band. Within that £1,000 band, basic rates apply (20% / 8.75%). When income is distributed to beneficiaries, it carries a 45% tax credit that basic-rate taxpayers can reclaim from HMRC. Bare trust income is taxed at the beneficiary’s own rate — often zero or 20% for a child or basic-rate taxpayer.
Capital Gains Tax
Trustees pay CGT at 24% on disposals in 2026/27. The annual CGT exempt amount for a trust is £1,500 — half the individual allowance — and is shared between trusts from the same settlor. Hold-over relief can defer CGT when assets leave the trust to beneficiaries, who then pay at their personal rate (18% or 24%) on any future sale.
Inheritance Tax
Discretionary trusts are “relevant property trusts” subject to a 10-year periodic charge of up to 6% on assets above the nil-rate band, and an exit charge when assets leave the trust. For most family trusts where the total assets sit below £325,000, both charges are nil. Married couples can use both nil-rate bands (£650,000 combined) before any periodic charge applies.
| Q: Is the HMRC Trust Registration Service free? A: Yes. HMRC does not charge a fee for registering online via the Trust Registration Service (TRS). However, if you use a solicitor or accountant to complete the registration, their professional fees will apply — typically £150–£500. Failure to register within 90 days can result in a penalty of up to £5,000 per trust. |
Common Questions About Trust Funds UK
Do I need a solicitor to set up a trust?
Technically, you can draft a trust deed yourself, but it is strongly not recommended. Errors in drafting can make a trust void (“uncertain objects” is a common problem with discretionary trusts where the beneficiary class is poorly defined), create unintended tax liabilities, or leave assets vulnerable to challenge. When researching trust funds UK options, The Law Society and Citizens Advice both recommend using a solicitor experienced in trust law.
Can I change a trust once it’s set up?
Most trust funds UK discretionary arrangements include powers for the trustees to appoint assets to beneficiaries or to vary the trust with beneficiary consent. A solicitor can also apply to the court under the Variation of Trusts Act 1958 if all adult beneficiaries agree. A bare trust, however, is very difficult to change once the beneficiary has an absolute entitlement.
What happens to a trust when the settlor dies?
The trust continues. The trustees carry on managing the assets according to the trust deed. The settlor’s death has no direct effect on the trust funds UK structure’s existence, although it may trigger IHT calculations if assets were within 7 years of being transferred into the trust. The trustees must update the HMRC Trust Registration Service within 90 days of any changes to trustees or beneficiaries.
Is a trust the same as a will?
No. A will only operates on death and must go through probate. A lifetime trust operates from the moment assets are transferred in — it bypasses probate entirely, which saves both time and cost. A will can create a will trust, but the trust itself only comes into effect on death. For more on what happens to an estate without a will, see our article on 7 Shocking Things That Happen When You Die Without a Will in the UK.
| 📞 Ready to Explore a Trust for Your Family? Trust law is a specialist area. The right trust funds UK solution, properly drafted, can save your family tens of thousands of pounds in IHT and care fees — while keeping your assets in the right hands. You may also want to read our guide on Funeral Plans UK — another vital piece of the estate planning jigsaw. Our recommendation: use a solicitor who specialises in estate planning rather than a general high-street firm. The Law Society’s ‘Find a Solicitor’ tool (lawsociety.org.uk) lets you search by specialism. Always get at least two quotes. Found this article useful? Share it with a family member who could benefit — or read our related guides below. |
Related Articles on Honest Pensioner
→ 7 Shocking Things That Happen When You Die Without a Will in the UK
→ Common Law Partner Rights UK: What You’re Entitled To
→ Divorce After 50 in the UK: What You Need to Know
→ Can I Inherit My Husband’s State Pension in the UK?
→ Free NHS Health Checks: What’s Available Over 40
→ Pension Inheritance Tax 2027: The Bombshell That Could Hit Your Family
→ Funeral Plans UK: How to Protect Your Family from the Hidden Cost of Doing Nothing
