Last updated: 16 April 2026
Trust funds: At a glance
- What do I need to know? Trust funds are designed to help share your wealth in line with your wishes, but the rules are often complex.
- Why does it mean for me? If you're interested in setting up a trust fund, you should consider speaking with a qualified financial adviser.
- Why does it matter? Although some trust funds can give you more control over how you pass on your wealth, you could pay more in tax if you're not careful.
Trust funds are legal agreements designed to pass on your wealth in different circumstances. But they can be tricky to understand, making the benefits difficult to decipher.
In this guide you’ll learn what a trust fund is, what the different types are, the benefits of trusts, and how they’re taxed.
What is a trust fund?
A trust fund holds cash, property, and other valuable possessions under a legal agreement so that you can share your wealth with others. This is usually managed on your behalf by an individual or a handful of people, known as 'trustees' (more on this later).
There are a handful of reasons why someone might open a trust. But one of the most popular is to hold and grow wealth for others to inherit.
How does a trust fund work?
Trusts involve three or more people taking on the following roles:
- Settlor: the person paying into the trust (you)
- Trustees: the people managing the trust (friends, family, wealth managers, or solicitors)
- Beneficiaries: the people benefitting from the trust (usually children or other loved ones)
Trusts can help you to choose how your loved ones will receive your money. But the level of control and costs depends on numerous factors, including the type of trust you open and how you set them up.
Fixed and discretionary trusts
Whether a trust is fixed or discretionary determines the rights of your beneficiaries to the wealth you pay in:
- Fixed trusts: The beneficiaries have an absolute right to the assets held in the trust, meaning their entitlement is fixed and not subject to trustee discretion.
- Discretionary trusts: Trustees are empowered to decide how and when the assets get passed on to beneficiaries.
If you’re considering opening a trust fund, it’s important to weigh up the benefits and disadvantages.
What are the benefits of trust funds?
Protecting assets for younger relatives
Trust funds may help ringfence some of your wealth for younger family members.
This is especially true for young children, which is why bare trusts can be a useful tool to protect and manage assets on their behalf until they come of age (more on this later).
Limited tax efficiency
There are some very limited circumstances in which trust funds can increase your tax efficiency, helping your family keep more of your wealth in line with HMRC guidance. Tax efficiency is ensuring that you use HMRC rules correctly to pay the right level of tax.
But the rules are complex. There are also risks your costs could increase or you may be accused of tax avoidance if you set up a trust incorrectly. There are strict rules around using trust funds to avoid paying the tax you owe, which is illegal.
Controlling the distribution of your wealth
Some trusts give you more control over the conditions in which someone inherits your estate.
For example, you can specify that you’d like any wealth you pass on to be spent responsibly, and define what that means in line with your values. You can also prevent the money from being included in divorce settlements.
Not all trusts do this. For example, discretionary trusts hand over your control completely to trustees.
What are the disadvantages of trust funds?
Complex taxes, costs, and charges
It can be expensive to set up and maintain a trust. Here are some of the main costs to consider:
- Inheritance Tax: HMRC usually calculates how much IHT you owe based on the value of the trust above the nil-rate band. Smaller trusts may face lower charges or none at all depending on your circumstances. IHT charges also depend on the type of trust and whether the assets in the trust are considered chargeable lifetime transfers or not. If you pass away within seven years of making a transfer into a trust, Inheritance Tax may be recalculated. IHT rules are very complicated and highly dependent on your financial circumstances, so you should speak to a qualified financial professional to understand your obligations.
- Income Tax: Most trusts benefit from a tax-free allowance (usually £500) on income. Beyond the allowance, Income Tax is due, but the exact amount depends on a range of factors. These can include your personal circumstances, the kind of income the trust generates (for example, dividends versus savings interest) and your role within the trust. Each trust has its own rules that can change how much Income Tax is due, or even who is required to pay it.
- Capital Gains Tax: You may need to pay CGT when an asset that’s increased in value either moves into or out of a trust. But there are circumstances where CGT doesn’t apply, such as when the trust itself owns property that’s been placed within it and it’s the main residence for someone approved to live there as referenced by the rules of the trust. You may be eligible for some tax relief on CGT depending on the type of trust. The rules are even more complicated for non-resident trusts.
- Exit charges: When assets that are considered relevant property leave a trust, you may need to pay a charge of up to 6% on the amount that’s dispersed. The rules are varied, so it’s essential to check how much you could be charged before a trustee makes a distribution.
- 10 year anniversary charges: Trusts that contain relevant property incur a charge every 10 years. This can be up to 6% though the exact amount depends on complex calculations detailed on the HMRC website.
- Setup and management costs: You’ll need to pay fees to solicitors and wealth managers to take care of the trust.
Whether you pay some or all of the costs listed above depends on numerous factors, including your personal circumstances and the type of trust you’ve opened.
Permanent gifting
Some trusts hand over your rights to the trustees. This is legally binding. You can’t take your assets back if you change your mind.
Types of trust funds
There are a handful of different types of trust funds in the UK, each with unique rules. The list of trusts includes:
- bare
- interest in possession
- accumulation
- discretionary
- mixed
- settlor-interested
- non-resident
Here’s how they work:
Bare trusts
In a bare trust, the beneficiaries have an absolute right to the assets in the trust from the outset. Bare trusts are often used by grandparents to gift money directly to younger family members, with the trustee managing the assets on their behalf.
When a child turns 18 (or 16 in Scotland), the beneficiary acquires full legal control. This means the trustees must transfer the assets into the beneficiary’s own name. Once this is completed, the bare trust has no purpose and will usually come to an end.
Interest in possession trusts
When a trust earns income, either through interest on cash, rent on buildings, or business profits, the money is immediately transferred to the beneficiaries. Although they earn money from the income generated by the trust, the beneficiaries aren’t entitled to the assets held in it.
Accumulation trusts
The people managing the trust can invest the income it generates, either by making separate purchases or adding to the trust itself. In an accumulation trust, you don’t have to give money to beneficiaries right away.
Discretionary trusts
You give the trustees full power to manage your wealth in a discretionary trust. They decide how, when, and whether it’s passed on. While you can still outline your preferences, trustees don’t have to follow your recommendations.
Mixed trusts
This lets you combine the rules of different trusts. For example, you can specify that one beneficiary enjoys interest in possession rights. Another beneficiary in the same trust has bare trust rights, meaning they’d only earn money once they reach the right age.
Settlor-interested trusts
You, your spouse, or both are listed as beneficiaries. Whatever the trust earns is treated as your income for tax purposes.
Non-resident trusts
Most of the people managing your trust are located outside of the UK. This makes tax rules complicated, which is why seeking the support of a financial adviser can be helpful.
How to set up a trust fund in the UK
Once you’ve checked whether a trust fund is right for you with a financial adviser, you’re ready to start the process.
The wording of the trust fund needs to be precise to avoid legal problems in the future. As a result, hiring a solicitor to write the initial document is usually the first step.
Next, decide on the type of trust that makes sense for your estate. Some types of trust are more complex to set up than others. This can increase your costs, as solicitors can charge by the hour for advice and support.
Choose your trustees and beneficiaries carefully. Ensuring that trustees have a high level of financial literacy is important. If you have other children, consider making a neutral third party a trustee to encourage impartial decision-making.
The final step is to draft the legal document defining the terms of the trust and, if required, register it with HMRC’s Trust Registration Service (TRS). Trustees can register a trust online, and HMRC also provides a separate online route for tax agents or advisers to register a client’s trust.
Frequently asked questions about UK trust funds
How much money do you need to set up a trust?
There is no minimum amount you need to set up a trust fund in the UK.
Who is entitled to a trust fund in the UK?
Anyone can set one up, but to access the wealth in a trust fund, you must be named as one of the beneficiaries. The rules of the trust place additional limits on your access.
Do you pay tax on a trust fund in the UK?
Yes. But the amount of tax you pay, as well as which taxes apply, can vary significantly.
You may have to pay Inheritance Tax, Capital Gains Tax, or Income Tax on the money you earn from a trust. The exact amount depends on a handful of factors including the type of trust, who benefits, and how long ago it was opened.
Do trust funds gain interest?
Yes, trust funds can sometimes earn interest, but it depends on the type of assets held within it. For example, a trust fund could contain savings accounts which earn interest.
But it’s important to bear in mind that trust funds themselves don’t automatically generate revenue. They’re a useful way to store other asset types together on behalf of other people. It’s the assets inside the trust that provide the value.
Pass on wealth with caution with trust funds
Trust funds can protect assets for a range of your loved ones in a number of different circumstances. But managing and maintaining trust funds can be expensive, and there’s considerable risk that you could complicate your tax affairs by opening a trust.
It’s important to seek professional guidance if you’re unsure how to safeguard your wealth.
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