Trusts in England and Wales: Benefits, Risks and Options

Quick answer: Trusts can protect family wealth and vulnerable beneficiaries, but they are not a tax-free shortcut. Common pitfalls include gifts with reservation when you still benefit from what you give away, 10-year charges on many discretionary trusts, and potential capital gains tax on transfers. Get tailored advice before you act.

A recent feature in The Sunday Times looked at how trusts are increasingly used by ordinary families. Below, we explain when a trust may help, where risks lie, and the simpler options you can consider first.

Why interest has surged

Inheritance Tax (IHT) thresholds have been frozen while asset values have climbed, and from 6 April 2027 most unused pension funds are due to fall within IHT.
This means more families are reviewing whether a trust or a simpler Will-based plan is the right fit.

What is a trust and how does it work?

A trust is a legal arrangement where trustees hold and manage assets for beneficiaries under rules set out in a trust deed.

Families use trusts to pass wealth in a controlled way, protect a home for a partner while ensuring it ultimately passes to children, support someone who may struggle to manage money, or plan as part of wider estate planning.

A trust should sit alongside a well-drafted Will and Lasting Power of Attorney.

When a trust is genuinely useful

• Supporting vulnerable or young beneficiaries

• Protecting the family home for a partner with the property ultimately passing to children

• Pacing how and when children receive significant wealth

• Coordinating with your Will writing and Probate planning

Risks and tax points to watch

Continuing to benefit from what you gave away

If you gift your home or other assets but keep enjoying them, HMRC may treat this as a gift with reservation, pulling the asset back into your estate for Inheritance Tax. Paying full market rent for continued occupation is one recognised route, but it must be genuine and documented.

10-year and exit charges on many discretionary trusts

Relevant property trusts can face a principal charge at each 10-year anniversary and exit charges when assets leave the trust. Good records and regular reviews are essential.

Capital gains tax on transfers and sales

Transfers into or out of trust can trigger capital gains tax, and later disposals by trustees may also be taxable. Reliefs exist in specific cases, so take advice before you move assets.

Transaction taxes

Property placed into or moved between trusts can have stamp duty land tax consequences.

Allowances and thresholds at a glance

Inheritance Tax (IHT) is usually charged at 40% on the part of your estate above available allowances. Two main allowances can reduce the bill:

Nil-rate band (NRB): £325,000
This covers the first £325,000 of your estate. Anything within this band is taxed at 0%.

Residence nil-rate band (RNRB): up to £175,000
An extra allowance when your main home passes to direct descendants (for example children or grandchildren). It tapers away once the estate is valued over £2 million.

Married couples and civil partners
If the first spouse or partner leaves everything to the survivor, their unused NRB and RNRB can usually be transferred. That means, in simple terms, many couples can pass on up to £1 million tax-free when the second person dies (£325,000 + £175,000, doubled).

A quick example

If your estate is £600,000 with a qualifying home left to your children, the £325,000 NRB plus up to £175,000 RNRB could shelter £500,000, leaving £100,000 potentially taxable at 40%.

Why this matters for trusts

Trusts should be built around these rules, not assumed to beat them. In some cases, using a trust can affect access to the RNRB or trigger separate trust-related charges, so the design and timing need careful advice.

Alternatives to consider

Trusts are powerful, but not always the right first step. Depending on your goals and tax position, consider:

• Will trusts – clauses that only take effect on death, often simpler and cheaper to run

• Lifetime gifts – outright gifts can work well if affordable and documented correctly

• Letters of wishes – non-binding guidance to your executors or trustees that adds clarity without extra legal structure

Real-world example

Protecting the family home in a blended family

Anna owns her house and wants her partner, Mark, to live there if she dies, but ultimately she wants the home to pass to her two children.
A life interest trust in her Will lets Mark live in the property for life while safeguarding the capital for the children.
The trust terms also set rules for maintenance costs and what happens if the home is later sold. This meets Anna’s goals without the complexity of transferring the house into a lifetime trust.

FAQs

What is a trust in simple terms?
A trust is a legal arrangement where trustees hold and manage assets for beneficiaries under rules in a trust deed.

Are trusts only for the wealthy?
No. Many families use trusts to protect a home, support children, or help vulnerable relatives. The key is matching the tool to the goal.

Do discretionary trusts pay tax every 10 years?
Many do. Relevant property trusts can face a principal charge at each 10-year anniversary and exit charges when assets leave.

What is a gift with reservation?
It is where you give an asset away but still benefit from it, for example gifting a house but continuing to live there rent-free. HMRC can treat the asset as still in your estate for Inheritance Tax.

Will I pay capital gains tax when I move assets into a trust?
Possibly. Transfers into or out of trust and later sales can trigger capital gains tax. Reliefs exist in some cases, so get advice first.

Next steps and how we can help

• Plain-English advice on whether a trust genuinely meets your goals

• Drafting Wills and letters of wishes that work alongside any trust

• Setting up and reviewing family trusts, including trustee guidance

• Lasting Power of Attorney to keep decision-making clear if capacity is lost

For clear, practical guidance on whether a trust is right for you, please contact our team for a free, no obligation, chat