There is no UK equivalent of the American "revocable living trust" that saves tax. A UK settlor can reserve a power to revoke a trust, but if the assets can come back to them, HMRC treats the gift as a gift with reservation of benefit. The assets stay in their estate for inheritance tax at 40%, and the trust income is taxed as theirs. Putting assets into most UK trusts is also an immediately chargeable transfer, with 20% tax on anything above the £325,000 nil-rate band.
UK estate planning therefore relies on trusts the settlor genuinely gives away: bare trusts, interest in possession trusts and, most often, discretionary trusts drafted to be flexible rather than revocable.
What a revocable living trust is, and why it does not travel
In the United States, a revocable living trust is a common way to hold assets during life so they pass on death without going through the probate courts. The person creating it usually acts as trustee and beneficiary and can cancel it at any time. It is mainly a probate tool rather than a tax-saving device.
UK tax law looks at who can benefit, not at what the trust is called. Three rules undo the American model:
- Inheritance tax. A gift is a "gift with reservation" if the property is not enjoyed "to the entire exclusion, or virtually to the entire exclusion" of the donor. HMRC's manual says a reservation arises even where the trustees merely have power to add the settlor as a beneficiary: "Only if the trust irrevocably excludes" the settlor will a reservation not arise;
- Income tax. The settlor is treated as having an interest in a trust if there are "any circumstances" in which the property "will, or may, become" payable to or applicable for the benefit of the settlor or their spouse or civil partner. A power to revoke in the settlor's favour is exactly such a circumstance. The trustees pay the tax, but the settlor is responsible for it;
- The entry charge. A reservation of benefit does not prevent the 20% lifetime charge on transfers into a relevant property trust. HMRC's guidance confirms that you "will pay 20% on the transfer and the gift will still count as part of your estate", although relief stops the total exceeding 40%.
The result is the worst of both worlds: tax on the way in, tax at death, and the cost of running a trust.
The UK alternatives
| Trust | Who controls the capital | IHT on creation | Can the settlor benefit? |
|---|---|---|---|
| Bare trust | Beneficiary, once 18 (16 in Scotland) | Treated as a gift to the beneficiary | No |
| Interest in possession (lifetime, post-2006) | Trustees; a beneficiary takes the income | Chargeable: 20% above the nil-rate band | Not without a reservation |
| Discretionary (flexible) trust | Trustees decide who benefits and when | Chargeable: 20% above the nil-rate band | Not without a reservation |
Bare trusts are the simplest. The beneficiary has "the right to all of the capital and income of the trust at any time" once they reach 18 in England and Wales. A gift into one counts as a gift to the beneficiary, so it falls outside inheritance tax if the giver survives seven years. But it cannot be revoked and the beneficiary cannot be changed.
Discretionary trusts are what most people mean when they ask for a flexible trust. The settlor names a class of beneficiaries and the trustees decide who receives what. A letter of wishes can guide them, and powers to add or remove beneficiaries keep the structure adaptable. Control comes from choosing the trustees, not from a power to take the assets back. Our guide to discretionary trusts covers them in detail.
How UK trusts are taxed under the relevant property regime
Most lifetime trusts other than bare trusts fall within the relevant property regime, which has three charges:
- Entry charge. Transfers that, together with chargeable gifts in the previous seven years, exceed the £325,000 threshold are taxed at 20% on the excess if the trustees pay. If the settlor dies within seven years, the rate is recalculated at 40%, with credit for tax already paid;
- Ten-year charge. On each tenth anniversary, the trust pays tax on relevant property above the threshold. The rate is three-tenths of the effective lifetime rate, so it cannot exceed 6%;
- Exit charge. Capital leaving the trust is charged at up to 6%. There is no exit charge on distributions within three months of the trust being set up or of a ten-year anniversary.
Worked example. Anna has made no gifts in the past seven years. She settles £425,000 on a discretionary trust for her grandchildren and the trustees pay the tax. Ignoring exemptions, £100,000 exceeds the nil-rate band, so the entry charge is £20,000. If she survives seven years, nothing more is due on the gift. If she had been one of the beneficiaries, the £20,000 would still be due and the trust fund would be taxed in her estate at death as well, subject to the double-charge relief. Our inheritance tax calculator shows how lifetime gifts interact with the nil-rate band.
Budget 2026 also announced rules to stop liabilities connected with trust property reducing inheritance tax values in unintended ways. They are to take effect for deaths and chargeable events on or after 28 October 2026, through Finance Bill 2026-27.
Registering the trust
Most UK express trusts must be registered on HMRC's Trust Registration Service, whether or not they pay tax. A non-taxable trust created after 6 October 2020 must be registered within 90 days of being created. A taxable trust created on or after 6 April 2021 must be registered within 90 days of becoming liable for tax; the 5 October deadline after the end of the tax year applies only to older trusts becoming liable to income tax or capital gains tax for the first time. Our guide to registering a trust explains the exclusions and penalties.
Choosing the right structure
If the aim is to avoid probate, weigh that against the cost: a trust that can trigger a 20% entry charge is an expensive way to sidestep an administrative process. If the aim is to cut inheritance tax while keeping control, the answer is careful drafting of a discretionary trust and the choice of trustees, not a power of revocation. Our overview of estate planning trusts compares the options.
Acumon's trust tax team handles registrations, ten-year charge calculations and trust tax returns, and our inheritance tax planning advisers work with your solicitor on structure before any assets move.