Trusts remain the most flexible tool in UK estate planning: they move value out of your estate while keeping control over who benefits, when, and on what terms. What they are not — despite half a century of dinner-party wisdom — is a magic box that makes inheritance tax disappear. Modern trusts have their own IHT regime, their own income and capital gains tax rates, and a registration duty, and using them well means knowing what each type actually buys you.
Here is the current landscape for 2026/27, including the changes that have quietly rewritten parts of the textbook.
The three trusts families actually use
Discretionary trusts give trustees full discretion over which beneficiaries receive what. That flexibility is the point: assets can skip a financially unstable child, wait out a divorce, or fund grandchildren unborn when the trust was created. The price is the "relevant property" IHT regime — a 20% entry charge on amounts settled above your available £325,000 nil rate band, a charge of up to 6% every ten years, and exit charges when capital leaves.
Life interest (interest in possession) trusts give one person — typically a surviving spouse — the right to income or occupation for life, with capital preserved for the next generation. They are the standard machinery of second-marriage planning: the widow keeps the house and income, the children of the first marriage keep the inheritance. On income, IIP trustees pay basic rates — 20% on most income, 10.75% on dividends after the 2026 rises — with the beneficiary then taxed at their own rates and credited for the trustees' tax (income mandated directly to the beneficiary skips the trustee layer altogether).
Bare trusts are the simple one: assets held in a trustee's name for a named beneficiary absolutely, taxed as the beneficiary's own. A gift into a bare trust is a potentially exempt transfer with no relevant-property charges — which makes them the cheap, effective vehicle for grandparents building funds for grandchildren. One statutory tripwire: where a parent settles funds and the income exceeds £100 a year, all of it is taxed on the parent. Grandparents are outside that rule entirely, which is why grandparent-funded trusts dominate this corner of planning.
Trusts for young people created on a parent's death (18–25 trusts) sit in a favoured middle ground — no ten-year charges, modest exit charges between 18 and 25 — and are largely a wills matter rather than lifetime planning.
What a trust costs in tax to run
The running costs are real and worth stating plainly. Discretionary trusts pay income tax at 45% (39.35% on dividends) once income passes the £500 de minimis — a cliff-edge, not an allowance: cross it and the whole income is taxable, and the £500 is split where the settlor has several trusts. Beneficiaries receiving distributions can often reclaim part of it. Trustees' CGT annual exemption is £1,500 (split between a settlor's multiple settlements, and higher for vulnerable-beneficiary trusts), and their gains are taxed at 24%. Every ten years, a relevant property trust faces the anniversary charge of up to 6% of value above the nil rate band. And nearly all express trusts must be on HMRC's Trust Registration Service — our TRS guide covers the deadlines and the £5,000 penalty question.
None of that makes trusts bad planning. It makes them planning: a 6% decennial charge against 40% inheritance tax on assets left in the estate is often a very good trade, particularly for growth assets settled early. But the arithmetic should be run, not assumed.
What changed recently — and it matters
- Business and agricultural property in trust. Since April 2026, 100% BPR/APR is limited to a £2.5 million allowance — and trust entitlement is conditional, not automatic: settlements holding qualifying property on 30 October 2024 have their own allowance, while later settlements acquire allowance only through the settlor's qualifying transfers, capped at £2.5 million across all of that settlor's trusts. The allowance operates in periods between ten-year anniversaries rather than resetting to a fresh full amount each time. Established structures that held qualifying assets before the announcement are often better placed than new ones — a genuine reason to review, not unwind, older arrangements. Our business property relief guide has the full mechanics.
- Pensions join the estate from April 2027. Most unused pension funds and death benefits will count for IHT (death-in-service and some dependants' benefits stay outside) — now law, not proposal. A generation of advice ("spend everything else, leave the pension") has inverted, and trusts are back in the conversation for wealth that pensions used to shelter by default.
- Frozen bands to 2031. The £325,000 nil rate band has not moved since 2009 and will not before April 2031. Every year of house-price growth pushes more ordinary estates into planning territory.
A note on "revocable living trusts"
Search results in this area fill up with American planning. The US-style revocable living trust — settlor keeps control, can unwind it, avoids probate — does not translate: a UK settlor who can revoke or benefit has made a gift with reservation (no IHT saving), is taxed on the income anyway under the settlor-interested rules, and gains no probate advantage worth having. UK trust planning works through irrevocable structures where the settlor genuinely gives value away. If a plan promises control, access and an IHT saving all at once, it is describing another country's law — or none.
When a trust is the right answer
The honest test is whether you need what only a trust provides: control after the gift. Outright gifts beat trusts on simplicity and running cost every time — if you are content for a 25-year-old to own the asset outright, give it outright. Trusts earn their keep where beneficiaries are young, vulnerable or in fragile marriages; where a second marriage needs both protection and provision; where the asset is a business interest that should not fragment; or where you want growth outside the estate while the ultimate destination stays undecided.
Set-up follows a rhythm: model the entry charge against the nil rate band (couples often settle £650,000 between them without one), consider holdover relief so the transfer in does not trigger CGT, register on the TRS, and diarise the ten-year anniversaries — the charge is calculable and plannable years in advance, which is exactly what trustees who take advice do.
Our trust tax team runs the compliance side — returns, registrations, anniversary calculations — and works with inheritance tax planning on structure, alongside probate where estates and will trusts meet. If your trust predates the 2026 reforms, or your estate plan still assumes pensions are outside IHT, both are due a review this year.