A trust fund is money, investments or property held by one person or group (the trustees) for the benefit of others (the beneficiaries), under terms set by the person who created it (the settlor). The trustees own and manage the assets, but must use them for the beneficiaries, not themselves. In the UK the tax treatment depends on the type of trust: in 2026/27 a discretionary trust pays income tax at 45% (39.35% on dividends), lifetime transfers into most trusts above the £325,000 nil-rate band attract inheritance tax at 20%, and the trust then faces a charge of up to 6% every ten years.
How a trust fund works
HMRC describes a trust simply as "a way of managing assets (money, investments, land or buildings) for people". Three roles are involved:
- Settlor. The person who puts assets into the trust, either during their lifetime or by will;
- Trustees. The people, or a professional trustee company, who hold legal title to the assets and manage them in line with the trust deed and the law;
- Beneficiaries. The people who benefit, whether by receiving income, capital or both.
The separation of legal ownership from benefit is the whole point. It lets a family provide for a child who is too young to manage money, protect assets for someone who lacks capacity, pass wealth on during life without handing over control, or set out in a will how an estate is to be held. Trusts also arise automatically in some cases, including under the intestacy rules where someone dies without a will.
Types of trust
The name on the deed matters less than how the beneficiaries' rights are framed, because that drives the tax:
- Bare trust. The beneficiary is absolutely entitled to the capital and income at any time once they are 18 in England and Wales, or 16 in Scotland. The beneficiary, not the trustees, pays the income tax;
- Interest in possession trust. A beneficiary is entitled to all the income as it arises, less expenses, often for life, with the capital passing to others later;
- Discretionary trust. The trustees decide who receives income and sometimes capital, and how much, from a defined class of beneficiaries;
- Accumulation trust. The trustees can add income to capital rather than paying it out;
- Mixed trust. A combination, with each part taxed under its own rules;
- Settlor-interested trust. The settlor, or their spouse or civil partner, can benefit. Income is taxed on the settlor;
- Non-resident trust. The trustees are not UK resident for tax purposes, which brings a separate and complicated set of rules.
Choosing between them is a planning exercise covered in more depth in our guide to estate planning trusts.
Income tax on trust funds in 2026/27
| Type of trust | Dividend income | Other income |
|---|---|---|
| Discretionary or accumulation | 39.35% | 45% |
| Interest in possession | 10.75% | 20% |
| Bare trust | Taxed as the beneficiary's own income | |
These are HMRC's published trust income tax rates. Most trusts have a tax-free amount, normally £500, but if income goes over it, tax is due on the full amount. For discretionary and accumulation trusts the £500 is divided between all such trusts made by the same settlor, with a minimum of £100 per trust where the settlor has made five or more. The interest in possession dividend rate rose from 8.75% to 10.75% on 6 April 2026, in line with the change to the individual dividend rates.
A further change is legislated but not yet in force. From 6 April 2027, the rate on property and savings income received by discretionary and accumulation trusts rises to 47%, and to 22% for other trusts, matching the new property and savings rates for individuals. The dividend trust rate of 39.35% is unchanged.
Capital gains tax and inheritance tax
Trustees have their own capital gains tax annual exempt amount of £1,500, half the individual allowance, or £3,000 where the beneficiary is vulnerable: a disabled person or a child whose parent has died.
Inheritance tax is the main constraint on lifetime trusts. Most property held in discretionary and similar trusts is "relevant property", and three charges apply to it:
- Entry charge. On a lifetime transfer into the trust, inheritance tax is due at 20% on the value above the £325,000 threshold where the trustees pay the tax. The calculation is more complex where the settlor pays the tax instead;
- Ten-year charge. On each tenth anniversary of the trust, a principal charge of up to 6% of the value of the relevant property;
- Exit charge. When assets leave the trust between anniversaries or the trust ends, a proportionate charge of up to 6%.
Bare trusts and certain trusts for disabled people and bereaved minors are treated more favourably.
Setting up a trust fund
In practice, starting a trust involves deciding its purpose and type, appointing trustees, having a solicitor draft the trust deed (or the will, for a will trust), and transferring the assets into the trustees' names. Many trusts must then be registered on HMRC's Trust Registration Service, which is explained in our guide to registering a trust. From then on the trustees are responsible for running the trust and its tax affairs, as covered in trustee duties and responsibilities.
Child Trust Funds
Many people searching for "trust fund" mean a Child Trust Fund. These are tax-free savings accounts for children born between 1 September 2002 and 2 January 2011. The scheme closed to new accounts in 2011, but existing accounts can still receive up to £9,000 a year. The child can take control of the account at 16 and withdraw the money at 18. You cannot hold a Junior ISA as well as a Child Trust Fund, but the provider can transfer the Child Trust Fund into a Junior ISA.
Acumon's trust tax team prepares trust tax returns, ten-year charge calculations and Trust Registration Service filings for trustees and families. If you think a Child Trust Fund has been lost, our Child Trust Fund tracing service can help locate it.