When it comes to financial planning, we often hear about strategies like investing, retirement planning, and tax optimisation. While these are indeed essential components of any comprehensive financial plan, there is another powerful tool that is often overlooked but can play a crucial role in securing your financial future – Trust Planning.

In this article we will introduce you to the concept of trusts and provide you with a basic understanding of what they are, how they work, and some common examples.

Rising significance of Trust Planning? 

Trust planning is a subset of estate planning and is gaining increasing importance for UK domiciled individuals. Historically, trusts have been associated with high levels of wealth. Whilst trusts are still a high net worth tool, the thresholds for when a trust might be beneficial have certainly reduced in recent years.

With a combination of asset prices rising over time and tax allowances remaining frozen until 2028, more and more people are falling foul of UK inheritance tax (IHT) on death (and for each individual estate, larger slices of the estate are becoming taxable).

IHT receipts received by HMRC have risen dramatically in recent years (record receipts of £7.2 billion are predicted for 2023) and government forecasts don’t indicate this slowing down any time soon.

What is a trust?

A trust is a legal arrangement that allows individuals or families to formally transfer assets to a small, trusted group of people (or a trust company) with instructions to hold and look after the assets for the benefit of someone else.

Trusts allow individuals or families to protect and manage their assets, provide for their loved ones, and minimise tax liabilities.

While the concept may seem complex, its underlying principle is relatively straightforward: to ensure that your assets are used and distributed in line with your wishes, both during your lifetime and after your death.

Who is involved with a trust?    

There a are 3 key people involved with a trust:

  1. The settlor – this is the person giving away the assets.
  2. The beneficiary – this is the person(s) who will ultimately benefit from or receive the assets.
  3. The trustees – these are the people (or a professional trustee company) that are responsible for looking after and managing the assets until they are passed to the beneficiary.

Why set up a trust? 

There are several ways trust planning can form a part of your overall financial plan. Some of the key reasons for setting up a trust are:

1. Tax Efficiency & IHT Planning
Trusts can offer significant tax advantages when structured correctly. Depending on the type of trust you choose, you may be able to reduce or even eliminate certain taxes, particularly inheritance tax.

This can result in substantial tax savings for both you and your beneficiaries.

2. Estate Planning and passing wealth to future generations
One of the primary reasons for setting up a trust is to facilitate the seamless transfer of your wealth to your heirs/beneficiaries upon your death.

As well as the obvious benefit of receiving the assets free of IHT, trusts can also help to avoid the often costly and time-consuming process of probate. This will ensure that your loved ones receive their inheritances quickly and efficiently.

3. Control
Trusts allow you to maintain a degree of control over the assets, even after they are gifted away and placed in a trust.

You can specify who will benefit, to what extent they will benefit, how and when the assets are distributed, and ensure that your wishes are carried out exactly as intended.

The day to day management of the trust assets is the responsibility of the trustees, but you can also act as a trustee and continue to be involved in the management of the assets (provided decisions are made in line with the terms of the trust and in the best interests of the beneficiaries).

Compare this to an outright gift where no trust is involved – the new owner assumes all rights over the asset and can do whatever they like with it. The individual who made the gift has given away all control.

This can be particularly useful when someone is too young to handle their affairs (for example, a trust ensures your children only get access to the money when they reach a certain age), or if you want the assets to be used for a specific reason (for example, to help your children buy their first home, or to pay for a wedding).

4. Flexibility
A trust can also allow the trustees to adapt as circumstances arise.

Again, compare this to an outright gift, where you cannot change your mind or gift the assets to someone else further down the line.

Good examples of future proofing here might be to protect against a beneficiary divorcing, or to account for grandchildren who are yet to be born.

5. Protecting Family Wealth
Trusts can also provide a level of protection for your assets that other forms of ownership do not.

By placing your assets in a trust, you can shield them from potential creditors, legal claims, and unforeseen financial challenges (for example, trust assets will not be included within the beneficiaries’ assets in the event of their divorce, bankruptcy, or death).

This is particularly valuable if you have substantial wealth or are in a profession that exposes you to liability risks.

6. Charitable Giving
If philanthropy is important to you, trust planning can be an excellent way to support your favourite charities.  

Charitable trusts can allow you to donate assets to your chosen charities while providing potential tax benefits for your estate.

Common Types of Trusts

There are several types of trusts available for UK domiciled individuals, depending on your objectives. Here are some of the most common types of trusts:

1. Discretionary Trust
This is the most flexible form of trust and one of the most commonly used.

The settlor can name a wide range of beneficiaries, or even class of beneficiaries.

The beneficiaries have no automatic right to receive income or capital from the trust.

The clue is very much in the name – the trustees have total discretion with regards to how they distribute capital or income. Provided decisions are made in accordance with the terms of the trust and in the best interests of the beneficiaries, they can decide on how to manage the assets, keep money accumulating within the trust, or if they choose to distribute, they can decide when, how much, and to whom.

For the purposes of protecting family wealth and cascading assets down to future generations, discretionary trusts are a very popular way of achieving this.

2. Bare Trust
This is the simplest form of trust.

A beneficiary is named at outset and cannot be changed.

The beneficiary has the right to the trust capital and any income generated from it, which means that the beneficiaries Income & CGT allowances can be used. Thus, income and gains could be tax free, if these allowances are not exceeded.

Because the beneficiary is known and fixed, a gift to a bare trust is considered a Potentially Exempt Transfer (PET) for IHT purposes – therefore, there is no limit as to what can be paid in, but you will need to consider your IHT position and potential exposure.

Bare trusts are particularly popular for a grandparent planning to gift money to a grandchild who is currently too young to receive the money outright – for example, picture someone who has recently become a grandparent. They could establish a bare trust today for the purposes of estate and IHT planning, and they could continue to manage the assets as a trustee. The grandchild could then receive the trust assets – IHT free – on their 18th birthday.

3. Interest in Possession Trust
This type of trust effectively separates the capital within the trust from the income it generates.

The trustees are not permitted to accumulate income within the trust, so any income generated must be paid out to a named beneficiary. This can be for a set period of time, but more commonly lasts for the lifetime of the beneficiary.

Then, the capital will pass to a different beneficiary.

Due to this arrangement, the beneficiary who receives this income is often referred to as the “life tenant”, while the beneficiary who eventually receives the capital is referred to as the “remainderman”.

When investing the trust assets, trustees have a responsibility to act in the best interests of both the life tenant and the remainderman and must consider both when making decisions.

These types of trusts can be created during life or on death, and are quite common in wills (for example, the income is left for the benefit of the deceased’s adult child, with the capital eventually passing to their grandchild).

4. Excluded Property Trust
This is a type of discretionary trust (as described as type 1), but an Excluded Property Trust is specifically for non-UK domiciled individuals. It can be a particularly useful planning tool for expat families who see their long-term future in the UK.

For example, in places like the UAE, it’s common to meet a British expat married to a non-UK domiciled spouse. It’s also common for them to see themselves eventually living or retiring in the UK.

In this situation, for the non-UK domiciled spouse, the starting position is that only their UK assets will be subject to UK IHT. In other words, their assets outside the UK will not be subject to IHT.

However, there is a likelihood that they will become UK-domiciled in future (this usually happens after spending 15 years in the UK). At that point, all their worldwide assets would fall fully into the UK IHT net.

Planning for this is where an Excluded Property Trust can become very useful. A non-UK domiciled individual can establish the trust to house non-UK assets. These assets then become “excluded property” from any IHT calculation. As such, even if the individual becomes UK domiciled in future, provided the trust assets are situated outside the UK, they will remain outside the scope of IHT.


Trust planning is a powerful strategy that can provide protection, control, and tax-efficiency for family wealth.

Trusts can, not only ensure assets flow effectively to the next generation (rather than to HMRC), but can also provide you with the peace of mind that comes from knowing that this will happen exactly in line with your wishes – you know exactly who will benefit, when they will benefit, and how they will benefit.

Whether you have substantial wealth or simply want to ensure that your loved ones are well cared for in the future, trusts can play a pivotal role in achieving your goals.

However, it must be stressed that trusts are a complex area of estate planning and are not a one-size-fits-all solution. Trust planning must be part of an overall holistic strategy and requires careful consideration and professional guidance to navigate effectively.

If you’re interested in exploring trust planning as part of your overall financial plan, it’s essential to work with experienced and qualified professionals who can help you create a customised plan tailored to your unique needs and goals.

If you think trust planning might be useful for you, get in touch and one of our in-house professionals will be able to discuss this with you and guide you in the right direction.

By Technical Team @ Abacus

Please keep in mind that, whilst we aim to update these articles periodically, the content could be subject to future rule changes. Always make sure to speak to a qualified professional to ensure you have the most up to date information and are taking regulated advice around your specific circumstances.