What is a will trust?

What is a trust?

A trust is a way of managing how assets are used or passed on.

It’s a specific legal arrangement in which one person (the settlor, or truster in Scotland) gives cash, property or assets to someone else (the trustees) to look after on behalf of another person or persons (the beneficiaries).

The person who puts assets in trust can decide how the assets should be used – this is normally set out in a will or a ‘trust deed’ – or give the trustee flexibility in managing and distributing the assets. This table explains the different roles involved:

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Will trusts vs lifetime trusts

There are two ways to set up a trust, depending on when you want the assets to be passed on:

• Will trusts: A will trust only comes into effect when you die. You set out the conditions of your trust in your will when writing it, and when you die, the assets are placed into trust rather than given directly to beneficiaries. 
• Lifetime trusts: You can use lifetime trusts to pass on assets while you're still alive. Lifetime trusts usually come into effect as soon as they’re set up. 

See our guide to inheritance tax and trusts to find out more about the different types of lifetime trusts and how they’re taxed.

This table sets out some of the key differences between will trusts and lifetime trusts:

Do I need a will trust?

If you’ve got a relatively straightforward estate, you probably don’t need to set up a will trust.

In some cases, trusts are created automatically. For example, in England and Wales, a bereaved minor's trust will be automatically set up if a child inherits from their parents under intestacy rules. 

The main reason you may want to consider setting up a trust is to give money to someone who is unable to manage money themselves:

• Giving money to children: If you use a trust to give money to a child, you can specify when and how they should receive it (such as when they turn 18).
• Financially supporting someone who is unable to manage money themselves (for example, due to a disability or mental health condition): trusts for vulnerable beneficiaries are a particular type of trust designed for this purpose and receive special tax treatment from HMRC.

You can also use trusts to control how money and property are passed on. For example, you could use a trust to leave your share of the family home to your children, while allowing your surviving spouse to continue living in the property until they die. 

This guarantees that your children receive your share of the property, even if your spouse remarries and doesn’t write your children into their new will.

Types of will trusts

You can write different types of trusts into your will, depending on how you want to pass on your assets. 

Here are some of the types of trust you can write into your will:

Bare trusts

Bare trusts are one of the simplest types of trusts. A beneficiary can access assets held in a bare trust at any time, as long as they’re aged 18 or over, or 16 in Scotland. Bare trusts are sometimes referred to as simple trusts in Scotland.

Bare trusts are usually used to give money or assets to children. If you leave assets to a child in a bare trust, they will be held by the trustee until the beneficiary turns 18 in England, Wales and Northern Ireland, or 16 in Scotland. At this point, the young person will receive the gift plus any income earned (such as savings interest).

Unlike other types of trusts, the beneficiary of a bare trust is treated as its owner for tax purposes.

Interest-in-possession trusts

Interest-in-possession trusts (also known as life-interest trusts) allow someone to receive income from or enjoy the benefit of an asset without owning it outright. 

For example, you can use this type of trust to specify that your spouse has the right to live in your property until they die, at which point it would pass to your children.

Discretionary trusts

This type of trust gives the trustee flexibility in distributing assets among multiple beneficiaries. 

A discretionary trust is usually accompanied by a letter of wishes, which gives guidance to the trustees on how the settlor would like the assets to be used. This can be wide-ranging and may give a beneficiary permission to live in a property or to receive income from investments.

Vulnerable persons trusts

Trusts for vulnerable beneficiaries are designed specifically to manage assets for disabled people and children whose parents have died. These trusts receive special tax treatment from HMRC; it depends on the beneficiary’s tax position and isn’t subject to the 10-year inheritance tax charge.

Vulnerable beneficiary trusts can help support someone who might struggle to make decisions about money or property, or is at risk of financial abuse. Passing on money via a trust can also protect a disabled person’s right to means-tested benefits.

The beneficiary(s) must meet certain eligibility criteria to set up this kind of trust. Visit the government website to find out who qualifies as a vulnerable beneficiary.

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How are will trusts taxed?

Trusts can have complicated tax implications, and different rules apply depending on the type of trust. Detailed information about how each type of trust is taxed is listed on the government website.

Here are some key things to be aware of about how assets in will trusts are taxed.

Inheritance tax

Putting assets into a trust in your will doesn’t automatically exclude them from your estate: assets placed in trust in your will are generally still considered part of your estate and taxed under standard inheritance tax rules.

However, placing assets into a trust can affect how inheritance tax allowances and exemptions are applied – and, in some cases, increase the amount of inheritance tax due. 

Inheritance tax is due on anything above £325,000 – this is known as your nil-rate band. However, anything left to a surviving spouse or civil partner is exempt from inheritance tax. 

And you’ll receive an additional allowance worth up to £175,000 (known as the residence nil-rate band) if you leave your home to a child or grandchild, so long as the estate is worth less than £2m.

Putting assets into a trust can affect how these allowances and exemptions are applied, as it can affect:

• Whether a home is treated as part of someone’s estate
• Whether a child/grandchild is treated as inheriting the home
• Whether a spouse is treated as inheriting assets.

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Ongoing tax liabilities

Will trusts need to be registered with HMRC if they still exist two years after the death of the settlor. The trustee will be responsible for submitting annual tax returns and paying any taxes due.

How assets held in trust are taxed, and who pays them, depends on the type of trust

Trusts that fall under the ‘relevant property’ tax regime

Trusts usually fall under what’s called the ‘relevant property’ tax regime if the beneficiary(s) don’t have the immediate right to the assets, or income from the assets.

Trusts that fall under the ‘relevant property’ tax regime normally pay tax on any income earned over £500. 

Taking assets out of a trust or selling shares or property can trigger a capital gains tax (CGT) bill if the total taxable gain is more than £1,500 (the CGT annual exemption for trusts). If the settlor has more than one trust, this allowance is divided equally across all relevant trusts. If the settlor has five or more trusts, each trust gets a minimum allowance of £300 – one fifth of the maximum allowance.

 An inheritance tax charge is due on every 10-year anniversary if the value of the trust is greater than £325,000. This can be up to 6% of the value of the trust assets. And transferring assets out of the trust may trigger an ‘exit charge’.

Trusts that don’t fall under the ‘relevant property’ regime

Bereaved minor, vulnerable persons, bare and life-interest trusts are treated slightly differently, as the beneficiary is treated as the owner for tax purposes.

Where assets are held in a life-interest trust, income tax is based on the beneficiary’s tax rate and allowances. The trustees may pass income directly to beneficiaries without paying tax first, in which case the beneficiary must report it via their self-assessment tax return. If the trustee has already paid tax on the income, the beneficiary may need to pay additional tax or claim a tax refund.

If assets are held for a child in a bare trust or a bereaved minor’s trust, there probably won’t be any tax to pay, as children are unlikely to have already used up their tax-free allowances.

Capital gains tax (CGT) might be due when taking assets out of the trust or selling shares and property if the total taxable gain exceeds the trust’s tax-free allowance. If the beneficiary of a trust is a vulnerable person or a bereaved minor, this is £3,000. 

Taking assets out of a bare trust doesn’t trigger a CGT bill, as the beneficiary is treated as owning them outright. However, CGT may be due if assets (such as shares or property) are sold. In this case, how much CGT is due will depend on the beneficiary’s rates and allowances.

• Find out more: capital gains tax rates and allowances.

Estate administration

Your executor will be responsible for making sure the trust is properly set up and that taxes are paid on assets entering the trust. After that, your trustee will be responsible for managing the trust and paying ongoing taxes.

Will trusts can affect how inheritance tax allowances apply and can make administering an estate much more complicated. If you’re an executor for someone who has written a trust into their will, you should consider seeking advice from a solicitor or tax professional.

• Find out more: how probate works.

How to set up a will trust

Trusts are complex legal structures, and you should seek professional advice if you’re considering writing one into your will to avoid any unintended consequences.

A solicitor who specialises in trust law will be able to advise if a trust is right for you and set one up properly. Prices typically start at around £1,000. 

Different laws apply in the devolved nations, so make sure you choose a solicitor qualified in the relevant jurisdiction: 

• In England and Wales, you can find qualified solicitors via the Society of Trust and Estate Practitioners (STEP) directory or The Law Society.
• In Scotland, visit The Law Society of Scotland.
• In Northern Ireland, visit The Law Society of Northern Ireland.

Some will-writing services offer wills with trusts, with prices starting from around £450. Take care, as will writing is an unregulated industry – look for a service that is regulated by the Solicitors Regulation Authority.

• Find out more: how to make a will.

What to consider when setting up a will trust

James Buchan, Which? lawyer, says:

'It's really important to consider your financial and family situation when considering including a trust in your will. This will determine which trusts are going to be relevant, suitable and potentially advantageous (or not!).

'Recently, will trusts have become a fashionable topic, and while they can seem like a good solution – and in lots of cases they are – trusts do have a certain amount of 'baggage'. For example, the beneficiaries won't own the asset and may have no right to it. There's also the administrative burden on trustees to register the trust, make sure they're documenting any decisions and using – or not using – their power appropriately. Plus, the taxation of trusts can be complex. 

Seek guidance before you proceed and consider how the trust will impact you, your estate and your beneficiaries.'

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