Types of trust, and what each one is for

What a trust is, in one paragraph

A trust splits ownership from benefit. You give assets to trustees, who legally own them, to hold for beneficiaries, who benefit from them. You decide the rules at the outset. Once the assets are in, they are generally no longer yours, which is the point and also the risk.

The type of trust determines three things: who is entitled to what, who pays tax on the income and gains, and how the assets are treated for inheritance tax. Those three answers are what follows.

Bare trusts

The simplest kind. The beneficiary is fixed from the start and is absolutely entitled to the assets. Trustees hold them but have no discretion. Most commonly used for children, where the assets pass to them outright at 18.

Income and gains are usually treated as the beneficiary's, which can be efficient where a child has unused allowances, though anti-avoidance rules apply where a parent provides the money. For inheritance tax, a gift into a bare trust is normally a potentially exempt transfer, so it falls out of your estate after seven years.

The catch: you cannot change your mind about who benefits, and at 18 the beneficiary can do as they like with it.

Discretionary trusts

Trustees decide who gets what and when, from a class of beneficiaries. Nobody has an automatic entitlement. That flexibility is why they are used where circumstances might change, or where a beneficiary should not receive money outright.

They sit in the relevant property regime, which brings a charge on entry above the nil rate band, a periodic charge every ten years, and a charge on assets leaving. The rates are lower than the headline inheritance tax rate but the administration is real and ongoing.

We have a longer piece on these: discretionary trusts explained.

Interest in possession and life interest trusts

One beneficiary, the life tenant, has a present right to the income or to occupy a property. Someone else, the remainderman, receives the capital when that interest ends, usually on death.

The classic use is a second marriage: the surviving spouse has the income and the right to live in the house for life, and the capital then passes to children from a first marriage. It solves a problem that outright ownership cannot.

Where the interest is a qualifying one, the assets are treated as part of the life tenant's estate on death rather than being taxed inside the trust. Which regime applies depends on when and how the trust was created, and that detail matters more than it sounds.

Will trusts

Not a separate type so much as a trust created by a will rather than during your lifetime. Any of the above can be a will trust. Common uses are protecting a share of a property for children, providing for a vulnerable beneficiary, or controlling when younger beneficiaries receive capital.

Nil rate band discretionary trusts in wills were once routine, to make sure both spouses' nil rate bands were used. Since the nil rate band became transferable between spouses, that particular reason has largely fallen away, though older wills still contain them and they can be worth reviewing.

Loan trusts and gift trusts

These are specific arrangements, usually built around an investment bond, and the difference between them is access.

With a gift trust you give the money away. It is outside your estate after seven years and you cannot have it back. With a loan trust you lend the money to the trustees instead. Growth accrues outside your estate, but the loan itself remains part of it and is repayable to you on demand.

A loan trust suits someone who wants to start the process without giving up access to capital they may need. A gift trust is more effective for inheritance tax but requires you to be certain.

Which one to use

For a lot of people the answer is none of them. Using allowances properly, gifting during your lifetime and making sure pension nominations and wills agree with each other deals with most estates, at no cost and with no ongoing administration.

A trust earns its keep where you need control that outright gifting cannot give you: a beneficiary who should not have direct access, a second family to provide for, or a business interest to hold together. If control is not the problem, a trust is usually the wrong tool.

From April 2027, unused pension funds count towards your estate, which is pushing more people to look at this. Our guide on the 2027 pension change covers what is actually changing.

Where advice ends and law begins

We advise on whether a trust is appropriate, which type fits, and how it sits alongside your pensions, investments and wider estate. We do not draft trusts or wills. That is a solicitor's job, and anyone offering both should be asked why.

In practice we work alongside your solicitor: we set out what the arrangement needs to achieve, they draft it, and we make sure what gets signed matches the plan.

The figures behind the relevant property regime, for reference. The nil rate band is £325,000 and is frozen until April 2030. Putting more than that into a discretionary trust triggers an entry charge of 20% on the excess. Every ten years there is a periodic charge of up to 6% on the value above the trust’s available nil rate band, and a proportionate exit charge applies when capital leaves, which in practice is often well under 1%.

This page is general information about the rules and does not constitute advice.

Last reviewed: 17 September 2026. Next review: Each tax year, and on any Budget change.