Many people think trusts are only useful for the ultra-wealthy. In reality, hundreds of thousands of families across the UK use them to pass down money safely and manage tax liabilities.
A trust is simply a legal arrangement where trustees look after assets for the benefit of someone else. Let’s take a closer look at how these structures work and how you can use them to protect your family wealth.
How Families Protect Assets Across Generations
Setting up these arrangements involves legal, tax and succession decisions that interact in complex ways, which is why both wealthy and ordinary families usually work with wealth management experts to make sure the structure fits their long-term goals. A business owner, for example, might want to keep personal property separate from potential business creditors if the company runs into trouble.
By using a trust, legal ownership of the asset moves from the individual to the trustees, so the assets may sit outside your personal estate. The level of protection depends on the trust type and timing. Bare trust assets stay in the beneficiary’s estate, and under the Insolvency Act 1986, courts can unwind transfers made to defeat creditors, so trusts aren’t a guaranteed shield against lawsuits or bankruptcy.
How Common Trust Structures Work for Families
A bare trust is the simplest option available. The beneficiary has an immediate right to the capital and income when they turn 18 in England, Wales and Northern Ireland, or 16 in Scotland. It’s popular with grandparents who want to fund a grandchild’s future university fees, putting money away early instead of handing over a large lump sum to a young child who might not be ready for it. One thing to note: bare trusts are irrevocable, so once you’ve named the beneficiary, you can’t change it.
Discretionary trusts offer much more control. The trustees decide how and when to distribute funds to the beneficiaries. This setup is useful if you have vulnerable beneficiaries who can’t manage money themselves, or if you want to protect wealth from being spent too quickly by younger relatives who still need financial guidance.
What to Expect with Trust Taxes and Charges
An interest-in-possession trust (also called a life interest trust) gives a beneficiary the right to any income generated by the trust during their lifetime, while keeping the capital ringfenced. It’s a common choice for family business succession, allowing a surviving spouse to receive income from company shares while ensuring the shares themselves pass to the children later.
Note that IIP trusts created during your lifetime after March 2006 are generally taxed under the same rules as discretionary trusts, including periodic and exit charges. The more favourable treatment applies mainly to IIP trusts created before that date, or those arising on death through a will.
Discretionary trusts are subject to a ten-year periodic charge. HMRC values the trust every ten years and applies a charge of up to 6% on the value above the nil-rate band, which is £325,000 for 2025/26 and frozen until at least April 2031.. There can also be exit charges when assets leave the trust, so careful planning is essential to avoid unexpected bills.
How to Weigh Setup and Maintenance Costs
While trusts offer real protection, they aren’t free to run. You’ll face upfront legal fees to draft the trust deed properly. There are also ongoing administrative costs, since trustees must file annual tax returns and keep detailed financial records.
Trustees also need to register the trust with HMRC’s Trust Registration Service within 90 days of creation, and update it within 90 days of any changes. Missing this can lead to penalties of up to £5,000.
Because of these expenses, it’s worth making sure the tax savings or protection benefits outweigh the ongoing fees. For most families, it’s worth it if you want to avoid a significant inheritance tax bill or keep control over how the next generation spends their inheritance.
Trusts Work Harder Than Most Families Realise
Trusts are versatile tools that offer practical benefits to families well beyond the ultra-wealthy. By choosing the right structure and working with a solicitor or STEP-qualified adviser, you can protect assets and support the next generation in a way that genuinely fits your circumstances.
The value of your investments and the income from them may go down as well as up, and you could get back less than you invested. Past performance should not be seen as an indication of future performance.