Skip to main content
WUHLD
← Back to articles

Using Trusts to Protect Your Estate: A Complete Guide for UK Wealth Builders

· 19 min

Note: The following scenario is fictional and used for illustration.

James, 42, owns a £450,000 house in Leeds with his wife, has £180,000 in investments, and runs a successful consulting business. His financial advisor mentioned he should "think about trusts" to protect his estate. James spent three evenings Googling and came away more confused than when he started.

Aren't trusts only for millionaires? Would a trust save him £50,000 in inheritance tax, or cost him £3,000 in solicitor fees for no real benefit?

In 2024, 733,000 trusts were registered in the UK—but most UK families don't need one. Yet for some, not setting up a trust can mean losing hundreds of thousands to inheritance tax or care home fees.

This guide explains exactly when you need a trust (and when you definitely don't), how trusts protect your estate, trust types, and real costs.

Table of Contents

What Is a Trust and How Does It Protect Your Estate?

A trust is a legal arrangement where you (the settlor) transfer assets to trustees who hold and manage them for chosen beneficiaries.

Once assets go into the trust, they're legally owned by trustees—not you. This removes them from your estate for inheritance tax, shields them from creditors, and avoids probate delays.

The trust deed specifies beneficiaries, distribution timing, and trustee powers. Every trust must be registered with HMRC's Trust Registration Service.

Emma sets up a discretionary trust with £200,000. She appoints her sister and a solicitor as trustees. When Emma dies, this £200,000 isn't counted in her estate for inheritance tax—it belongs to the trust. Trustees distribute it to Emma's children gradually rather than as a lump sum at 18.

UK trusts generated £3.115 billion in total income in 2023-24, showing widespread use for managing family wealth.

The 5 Main Types of Trusts in UK Estate Planning

1. Bare Trust: Beneficiaries get absolute rights to capital and income at 18 (England/Wales) or 16 (Scotland). Simple structure with no trustee discretion once beneficiary reaches age. Tax-efficient as income/gains taxed to beneficiary. Major limitation: zero flexibility—beneficiary gets full access at 18 regardless of maturity.

2. Discretionary Trust: Trustees have complete control over distributions. Maximum flexibility for uncertain situations. Costs include 6% periodic charges every 10 years, income tax at 39.35% on dividends and 45% on other income above £500 allowance. Best for families with vulnerable beneficiaries or changing needs.

3. Interest in Possession Trust (Life Interest Trust): One beneficiary receives income, while capital preserved for different beneficiaries later. Classic for remarriage—spouse gets security while children from first marriage ultimately inherit. David creates a life interest trust giving his new wife the right to live in his £500,000 home, with children inheriting when she dies or moves out.

4. Accumulation Trust: Income added to capital rather than distributed. Builds wealth for young beneficiaries over time. Perpetuities and Accumulations Act limits accumulation periods. Tax treatment mirrors discretionary trusts—expensive unless strong justification exists.

5. Will Trust vs Lifetime Trust: Will trusts activate on death through your will—simpler setup, no lifetime protection. Lifetime trusts start while alive with immediate asset transfer. For IHT planning, lifetime trusts trigger the 7-year rule—survive 7 years and assets are removed from your estate. For care fee protection, only lifetime trusts work—will trusts can't protect against your own care costs.

When Do You Actually Need a Trust? (And When You Don't)

You Likely Need a Trust If:

Estate exceeds £325,000 (nil rate band) or £500,000 (with residence nil rate band): The £325,000 nil rate band is frozen until 2030. Add £175,000 residence nil rate band for homes left to children. Couples combine allowances—up to £1 million IHT-free. Above these thresholds, 40% IHT applies. Trusts can mitigate this.

Protecting assets from care home fees: Means-testing thresholds set upper limit at £23,250. Above this: full costs (£700-850 weekly nationally, £1,000+ in South East). Lifetime Asset Protection Trusts can shield assets if set up many years before care needs.

Complex family dynamics: Blended families need trusts for both/and solutions—providing for new spouse while protecting children from first marriage. Unmarried couples risk partner homelessness under intestacy rules. Vulnerable beneficiaries (disabled, addiction issues, immature) need discretionary trust protection.

Business assets or complex investments: Business Property Relief planning, succession, and multi-generational portfolio management require trust structures.

You Probably Don't Need a Trust If:

Estate under £325,000 (or £500,000 with home): Sarah and Tom own a £380,000 house and £50,000 savings (£430,000 total). A simple WUHLD will covers guardians and inheritance. Under £500,000 threshold = no IHT. Trust costs exceed non-existent tax savings.

Straightforward family: Married/civil partnership with shared children, everything to spouse then children equally, no vulnerable beneficiaries? A will handles this perfectly.

Under 40 with modest assets: Focus on basic will now. Revisit trusts in 5-10 years as wealth grows.

Jointly owned assets: Joint tenancy passes automatically to survivor. No trust needed unless you want to protect your half for specific beneficiaries.

How Trusts Reduce Inheritance Tax (With Real Numbers)

IHT charges 40% on estates above nil rate band. IHT receipts hit record levels in 2024-25 as frozen thresholds and rising property values push more estates into taxation.

7-Year Rule: Transfer assets to trust while alive. Survive 7 years = assets removed from estate completely (Potentially Exempt Transfer). Die within 7 years = still taxable, but taper relief applies for deaths between 3-7 years.

Periodic Charges: Discretionary trusts pay 6% every 10 years. Example: £500,000 trust pays £30,000 per decade (£90,000 over 30 years). If that £500,000 stayed in your estate: (£500,000 - £325,000) × 40% = £70,000 IHT. But with growth to £800,000: periodic charges ≈ £150,000 vs £190,000 IHT if in estate. Trust saves £40,000 plus provides control.

Married Couple Example (£900,000): Without trust: £900,000 - £500,000 (residence nil rate band) - £325,000 (nil rate band) = £75,000 × 40% = £30,000 IHT. With nil rate band trust: Trust grows to £585,000, periodic charges ≈ £70,000. Spouse's estate: £30,000 IHT. Total: £100,000—trust costs MORE in this scenario.

High Net Worth Example (£2 million): Without trust: (£2m - £325,000) × 40% = £670,000 IHT. With lifetime trust (survived 7 years): £1m in trust, £1m in estate. IHT: £270,000 + £60,000 periodic charge = £330,000. Saves £340,000.

Trusts save IHT on estates over £1 million. Below £800,000, simpler strategies often cost less.

The Truth About Trusts and Care Home Fees

Care costs average £700-850 weekly (England), £1,000+ in South East. Over 2-3 years: £109,000-£132,600 total. Means-testing threshold: £23,250. Above this, you pay full costs (home included unless spouse lives there).

Asset Protection Trusts transfer property to trustees, excluding it from means-testing. You can retain Life Interest (right to live there).

The problem: Deliberate deprivation. Care Act 2014 lets councils challenge trusts set up to avoid fees. They assess: timing (how long before care needs?), health (were you declining?), other assets (could you pay without this transfer?), and intent (was avoiding fees the main reason?).

No 7-year rule exists for care fees. While the 7-year rule applies to IHT, councils can investigate deliberate deprivation any time. The concepts are unrelated.

When trusts work: Margaret, 68, healthy, transferred her £350,000 house to trust in 2015 as part of broader estate planning. Needed care 2024 (9 years later)—council accepted trust. Her £80,000 savings paid initial care. House protected.

When trusts fail: Bernard, 79, early dementia 2022, transferred £300,000 house to trust 2023. Needed care 2024—council immediately challenged as deliberate deprivation. No other assets, cognitive decline at setup, care needs within 18 months. Trust provided zero protection.

Bottom line: Trusts protect assets only if set up many years before care needs, part of broader estate planning, while healthy, with other assets available for care costs. If you're 70+, unwell, or care foreseeable within 5 years, trusts likely won't help.

What It Really Costs to Set Up and Maintain a Trust

Setup costs: Solicitor fees: £1,000-£1,500 (simple bare trust), £1,500-£2,500 (discretionary trust), £2,500-£5,000+ (complex trusts). Will trusts add £500-£1,000 to basic will costs. DIY kits (£150-£500) risk errors for estates over £200,000. Asset transfer costs: Land Registry fees (£40-£910) + conveyancing (£500-£1,000) for property. Broker fees (£25-£100) for investments. Valuations (£500-£2,000+) for business assets.

Ongoing costs: Trustee fees: family trustees often unpaid, professionals charge £500-£2,000 annually, corporates £1,500-£5,000+. Accounting/tax compliance: £300-£800 annually for trust tax returns. Investment management: 0.5-1.5% of assets (£1,000-£3,000 yearly on £200,000).

Tax costs: IHT on setup: 20% on transfers over £325,000. Periodic charges: 6% every 10 years on discretionary trusts (£24,000 per decade on £400,000). Income tax: 39.35% on dividends, 45% on other income above £500 allowance.

Total example (£400,000 discretionary trust, 20 years): Setup £3,000 + trustee fees £20,000 + accounting £10,000 + periodic charges £48,000 = £81,000 total (£4,050/year average). Compare: WUHLD will £99.99 one-time, solicitor will £300-£500, probate £273.

For £400,000 estate: periodic charges £48,000, might avoid £30,000 IHT—trust costs more unless primary value is control/protection, not tax. Under £500,000: trusts rarely cost-effective. £500k-£1m: marginal. Over £1m: often justified by IHT savings alone.

Common Trust Mistakes That Cost Families Thousands

Not funding the trust: Most common error—sign deed, never transfer assets. Unfunded trust = worthless paper. Property needs Land Registry updates, accounts retitled to trustees, investments transferred through brokers. Without completion, no protection.

Wrong trustees: Appointing one trustee (need two minimum), choosing elderly/incapable people, all family or all professional (need balance), no succession planning. Best: 2-3 trustees mixing family knowledge with professional objectivity, consider longevity, include successor provisions.

Vague instructions: "Distribute as trustees see fit" creates disputes and confusion. Need: detailed trust deed by specialist solicitor, letter of wishes explaining intent, specific beneficiary definitions, clear distribution conditions.

Ignoring tax: Missing TRS registration (mandatory), late tax returns, unclaimed reliefs, no periodic charge planning. Need: accountant specializing in trusts, register immediately, calendar deadlines, model tax impact before setup.

Set and forget: Never reviewing after setup, not updating for beneficiary changes, ignoring law changes, no decision documentation. Need: annual trustee meetings with minutes, review every 3-5 years or after major life events, professional reviews when laws change.

DIY for complex situations: Templates miss crucial clauses, create ambiguities, unexpected tax charges. Johnson family: bare trust defaulted to 18, grandson Jake claimed £150,000, burned through £80,000 in 18 months. Should have used discretionary trust with staggered distributions. Cost: £80,000+ wasted plus family conflict.

Trust vs Will: Which Does Your Estate Actually Need?

What wills do (trusts don't): Appoint guardians for minor children, name executors, cover all assets including those not in trusts, record funeral wishes, simpler and cheaper for straightforward estates.

What trusts do (wills don't): Avoid probate (faster, private), provide lifetime asset protection, enable granular control with conditions and ongoing discretion, protect from bankruptcy/divorce/creditors, reduce IHT if structured properly, survive incapacity.

Will trust hybrid: Trust clause within will combines benefits—will covers guardians/executors, trust provides control. Common for protective property trusts: "I leave my share to life interest trust for spouse, remainder to children."

Decision framework:

Just a will if: Estate under £325,000 (£500,000 with home), married with shared children, straightforward distribution, no vulnerable beneficiaries, limited assets. Emma and Jack (32, 34) married, two kids, £280,000 house, £40,000 savings = simple WUHLD will for guardians. No trust needed for £320,000 estate under IHT thresholds.

Will + will trust if: Estate £325k-£1m, blended family, want to protect home for children while providing for spouse, concerned about IHT but not ultra-wealthy.

Lifetime trust if: Estate over £1m, want to reduce IHT via 7-year rule, serious care fee concerns (10+ years before likely needs), complex business assets, vulnerable beneficiaries needing long-term protection. David (58) business owner, £1.8m estate = lifetime discretionary trust (£3,000-5,000) to remove assets from estate, plus comprehensive will. Substantial IHT savings justify costs.

Need both: Trusts cover only transferred assets. Wills handle everything else (pour-over provisions), appoint guardians, name executors. Most complex estates need trusts and wills working together.

How to Set Up a Trust: The Step-by-Step Process

Step 1 (1-2 weeks): Determine need—review estate value, assets, family situation. Consult financial advisor if over £500,000. Honest assessment: necessary or overkill?

Step 2 (1-2 weeks): Choose trust type and trustees. Select appropriate type (discretionary, interest in possession, bare, will). Identify 2-3 trustees: family member who knows beneficiaries, professional for objectivity, ensure willing and capable. Ask formally, explain responsibilities, consider successors.

Step 3 (1-2 weeks): Engage specialist solicitor. Find trust and estate planning specialist (STEP membership indicates expertise). Consultation: explain goals, family, assets, concerns. Get fixed fee quote. Typical timeframe: 4-8 weeks instruction to completion.

Step 4 (2-4 weeks): Draft trust deed. Solicitor drafts identifying settlor/trustees/beneficiaries, specifying trust property, defining powers/duties, detailing distributions, establishing appointment/removal procedures. Review carefully, ask questions, write letter of wishes. Final approval and signing.

Step 5 (4-8 weeks): Transfer assets—CRITICAL step. Property: Land Registry TR1 transfer via solicitor (check Stamp Duty, update mortgage lenders if needed), costs £500-£1,000+. Bank accounts: open new accounts titled "[Trustees] as trustees of [Trust]," transfer funds. Investments: contact broker (ISAs can't be held in trust—must liquidate). Business assets: may need shareholder approval, valuation for tax. Keep detailed records for HMRC.

Step 6 (immediately): Register with HMRC. TRS registration mandatory within 90 days. Provide trust details, all trustees' details, all beneficiaries' details if known, trust assets in value bands. Register online at GOV.UK TRS. Keep UTR for tax returns.

Step 7 (ongoing): Annual administration. Annual trustee meetings with documented minutes, file trust tax return (SA900) if income over £500 or capital gains, pay tax due, update TRS when changes occur, review every 3-5 years or after major life events.

Total timeframe: 3-5 months from decision to fully operational trust.

Alternative Ways to Protect Your Estate Without a Trust

Spouse inheritance + transferable nil rate band: Couples transfer unused nil rate bands—combined £650,000 (2 × £325,000) plus £350,000 residence nil rate bands (2 × £175,000). Total £1 million IHT-free without trust complexity. Simple will leaving all to spouse, then children.

Lifetime gifting: Annual exemption £3,000, small gifts £250/person unlimited recipients, wedding gifts £5,000 to child/£2,500 to grandchild, regular gifts from surplus income unlimited if not affecting standard of living. 7-year rule makes gifts exempt, taper relief 3-7 years.

Life insurance to cover IHT: Policy written in trust pays out to cover IHT bill—outside estate, no IHT, fast access. £200,000 IHT liability = £200,000 coverage. Costs: £50-300 monthly depending on age/health.

Business Property Relief (BPR) and AIM: Qualifying business assets: 100% IHT relief after 2 years. Many AIM shares qualify. Strategy shifts portfolio to BPR-qualifying investments—higher risk, requires professional advice.

Pension wealth: Historically exempt from IHT. April 2027 change includes pensions in estate. Still: death benefit nomination controls distribution outside will, can nominate discretionary beneficiaries for flexibility.

Charitable giving: 100% exempt from IHT. Leave 10%+ to charity: reduces IHT rate from 40% to 36%. Example: £500,000 estate (£175k exempt), £325k taxable. Leave £32,500 to charity (10%): saves £24,700 IHT vs £32,500 to charity instead of HMRC.

Simple will: For estates under £325,000, straightforward will provides sufficient protection. Clear instructions prevent disputes, appoint guardians, name executors, update every 3-5 years. Cost: £99.99 with WUHLD vs £2,000+ for trust.

Frequently Asked Questions

Q: When do I need a trust instead of just a will?

A: You may need a trust if your estate exceeds £325,000 (the inheritance tax threshold), you want to protect assets from care home fees (set up 7+ years in advance), you have complex family situations like blended families or vulnerable beneficiaries, you own business assets that need protected succession planning, or you want to control how and when beneficiaries receive their inheritance.

Q: What's the difference between a discretionary trust and a bare trust?

A: A discretionary trust gives trustees full control to decide how and when to distribute income and capital among beneficiaries based on changing circumstances. A bare trust gives beneficiaries an absolute right to both capital and income once they reach 18 (England/Wales) or 16 (Scotland), with no trustee discretion. Discretionary trusts offer more control and flexibility but face periodic inheritance tax charges every 10 years.

Q: How much does it cost to set up a trust in the UK?

A: Setting up a trust through a solicitor typically costs £1,000-£3,000+ depending on complexity, plus annual trustee fees of £500-£2,000 and ongoing accounting costs for tax returns. DIY trust kits cost £150-£500 but risk errors that could invalidate the trust or create unexpected tax liabilities. For estates over £500,000 or complex situations, professional setup is strongly recommended.

Q: Can a trust really protect my assets from care home fees?

A: A trust can protect assets from care home fees only if set up well in advance of needing care—ideally 7+ years before. If local authorities suspect the trust was created deliberately to avoid care fees (called 'deliberate deprivation of assets'), they can still assess the property as yours. Trusts set up when you're healthy and as part of broader estate planning are less likely to be challenged.

Q: Do I still need a will if I have a trust?

A: Yes, you still need a will even if you have a trust. A will covers any assets not transferred into the trust (called a 'pour-over will'), appoints guardians for minor children, names executors to handle probate, and provides funeral wishes. The trust handles specific assets you've transferred into it, while your will manages everything else.

Q: What are the tax implications of setting up a trust?

A: Trusts face several tax implications: inheritance tax at 20% on transfers over the nil rate band (£325,000) when setting up, periodic charges of up to 6% every 10 years on discretionary trusts, exit charges when assets leave the trust, plus income tax at 39.35% on dividends and 45% on other income (after a £500 allowance). However, trusts can reduce overall inheritance tax if structured correctly, particularly for estates over £1 million.

Q: Can I be a trustee of my own trust?

A: Yes, you can be a trustee of your own trust, particularly for living trusts where you want to maintain day-to-day control. However, for asset protection and tax benefits, it's often better to appoint independent trustees alongside yourself or instead of you. Being your own trustee may limit the trust's ability to protect assets from creditors or care fees assessments.

Conclusion

Trusts are powerful estate protection tools—but not required for everyone. Most UK families with estates under £325,000 only need a straightforward will.

If your estate exceeds inheritance tax thresholds (£325,000 individual, £500,000 with home for children, £1 million for couples), trusts can save tens or hundreds of thousands in tax. But timing is everything for care fee protection—trusts must be set up many years before care needs or they'll be challenged as deliberate deprivation.

Different trust types serve different purposes. Discretionary trusts offer flexibility but cost more in tax. Bare trusts are simple but give full access at 18. Life interest trusts protect children while providing for a spouse.

Trust costs are significant—£2,000-5,000 to set up, £1,500-2,500 annually to maintain—so they're only worthwhile if tax savings or protection benefits justify the expense.

Key takeaways:

  • Trusts protect assets through legal ownership transfer to trustees who manage for beneficiaries
  • Five main trust types each suit different situations—discretionary, bare, interest in possession, accumulation, and will vs lifetime
  • Only estates over £500,000 or those with complex families typically justify trust costs and complexity
  • Care fee protection requires setup many years before needs arise—no magic "7-year rule" guarantees protection
  • Total 20-year costs for a £400,000 trust can reach £81,000—weigh this against potential £30,000-340,000 IHT savings depending on estate size

James (from our opening) realized his £630,000 estate could use spousal exemptions and combined nil rate bands. He and his wife created straightforward wills with WUHLD, appointed guardians for their children, and saved £2,000+ in trust setup costs. In 10 years, when his business grows and his estate pushes toward £1 million, he'll revisit trusts. For now, his family is protected without overcomplicating things.

Most UK families don't need the complexity of a trust—a straightforward will provides all the protection you need. With WUHLD, you can create your legally binding will in just 15 minutes online for £99.99 (vs £650+ for a solicitor). You'll get your complete will plus a Testator Guide, Witness Guide, and Asset Inventory—and you can preview everything free before paying.

Preview Your Will Free – No Payment Required

Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.

Sources: