Trusts: More Common Than You Think

Trust Me – You Probably Already Have One

For many people, the word “trust” sounds a bit serious — the sort of thing that comes with a stack of paperwork, a stiff brew, and someone saying “now don’t panic, but…”. In reality, trusts are tucked away in all sorts of everyday financial bits and pieces, which means you’re probably already part of one without knowing it. Half the time, folk have been “in a trust” for years without ever filling anything in, signing anything dramatic, or putting on owt smarter than their normal jumper.

If you’ve got a pension, life insurance, joint property, or even a few investment funds, then congratulations — you’re already part of a trust.

So what actually is a trust?

What Is a Trust?

Think of a trust as a safety box for assets — like money, property, or investments — where one person (the trustee) looks after what’s inside on behalf of someone else (the beneficiary).

The person who sets it up (the settlor) decides the rules: who benefits, when, and how. Once the assets are in the box, they legally belong to the trust, not the person who put them there. That’s what makes them useful — for protecting family, managing inheritance, or simply keeping things organised.

It’s not about being rich or secretive. It’s about structure and protection.

Where You’ll Find Trusts (Without Realising It)

1. Your Pension

Every workplace or private pension sits inside a trust. The trustees hold and invest the money for your benefit. That’s why your pension is safe even if your employer folds — the assets belong to the pension trust, not the company.

2. Life Insurance Policies

Many life insurance policies are written in trust so that the payout goes straight to your loved ones, avoiding probate delays and, in many cases, inheritance tax.

For example, imagine a £100,000 life policy. If it isn’t in trust, the payout goes into your estate when you die — and could add another £40,000 to your inheritance tax bill. If it is properly written in trust, the whole £100,000 goes directly to your named beneficiaries — quickly, tax-free, and without waiting for probate.

What often surprises people is that policies are not automatically written in trust. This is particularly common with policies bought on a non-advised basis — for example, those purchased online through comparison sites, supermarket-branded insurance portals, or “quick quote” providers where you answer a handful of questions and click “buy now”. These policies are convenient, but they usually don’t prompt you to complete a trust form, which means the payout defaults into your estate unless you take further action.

Important note: Most trusts, including life insurance trusts, now need to be registered with HMRC’s Trust Registration Service — even if the trust isn’t paying any tax. This catches many people out, so if you’ve set up a life insurance trust, make sure it’s been properly registered.

3. Property You Own Jointly

People often say, “We own the house jointly”, but that phrase can mean two very different things — and it really matters which one applies to you.

If you own your home as joint tenants, the legal structure works like a trust behind the scenes. When one of you dies, the property automatically passes to the survivor, no matter what the will says. That’s because of the right of survivorship — the ownership is blended together.

If you own as tenants in common, it’s a completely different setup. Each of you owns a distinct share, and you can leave your share to whomever you wish in your will — a spouse, child, or anyone else.

It’s the same property, but the way it’s legally held makes a huge difference to what happens next. And this doesn’t just apply to your home — all land and property ownership works the same way behind the scenes. Should I stay or should I go? (The Clash) — well, that depends on how the title’s held.

4. Investment Funds

When you invest in a fund — such as a unit trust — your money joins thousands of others in a big pot legally held under a trust. You’re a beneficiary, and the fund manager is effectively the trustee, investing that pooled money on your behalf. Money, money, money (ABBA) — all sitting in a trust wrapper.

5. Family and Inheritance Planning

This is where people think trusts start, but it’s just one area. Parents and grandparents often use trusts to:

• Save money for children or grandchildren
• Let a spouse stay in the family home for life while keeping it for the kids long term
• Protect vulnerable family members or control when someone receives their inheritance

A word of caution if you’re considering a bare trust for children: while these are simple and tax-efficient, beneficiaries get absolute entitlement at age 18 (in England and Wales). That means your carefully saved nest egg could legally go towards a gap year in Ibiza rather than a house deposit — something to bear in mind before you set one up.

6. Charitable and Special Purpose Trusts

Charities are nearly always structured as trusts. There are also special-purpose versions, like those set up to look after a family grave or pay for the upkeep of a village clock tower.

Can You Change Your Mind? (Revocable vs Irrevocable Trusts)

One of the biggest sticking points when people first consider using a trust is control — the moment you give something away, do you lose it forever?

A revocable trust is one you can change or undo later. You’re still in control of the assets and can take them back if your circumstances or plans change. These are rare in the UK because HMRC tends to ignore them for tax purposes — if you can get the assets back, they’re still treated as yours.

Most UK trusts are irrevocable, meaning once you’ve placed assets into the trust, you can’t simply pull them back out or rewrite the rules. You’ve given them away — legally speaking — even though trustees manage them for the benefit of the people you’ve chosen.

That might sound scary, but it’s also the point: if the assets no longer belong to you, they’re outside your estate for inheritance tax, protected from remarriage, creditors, or care costs. The trust becomes its own legal “wrapper”, with its own life separate from yours. You can’t always get what you want (The Rolling Stones), but sometimes what you need is that permanent separation.

The Tax Side of Trusts

Once you understand how trusts work, the next question is always the same: “How does the tax work?”

There are really four stages to think about — getting stuff into the trust, what happens while it’s in there, what happens when assets or money come out again, and the inheritance tax position throughout.

Stage 1: Getting Stuff Into the Trust

When people hear that trusts can be “taxed”, they often assume that simply putting something into a trust automatically triggers a big tax bill. That’s not true — it depends entirely on what kind of trust it is and why it exists.

Your Pension – Putting money into your pension is technically putting money into a trust, and far from creating a tax charge, it actually reduces your tax bill. You get tax relief now, and the tax only comes later when you draw the money out.

Life Insurance – Setting up a life policy in trust doesn’t create a tax bill either. You’re not transferring existing wealth; you’re creating a future payout that will go straight to your beneficiaries.

Joint Property – Owning your home as joint tenants already creates a trust-like structure between you and your co-owner, but again, there’s no tax event at that point.

Investment Funds – Investing in a unit trust doesn’t trigger a tax charge when you buy in — you’re just joining an existing pooled trust structure managed by professionals.

Family and Discretionary (Flexible) Trusts – Now this is where the tax story changes. When you set up a new trust to give away existing assets — like a rental property, shares, or an investment portfolio — you’re not just being generous. In the eyes of HMRC, you’re effectively selling those assets at their market value, even if no money actually changes hands.

HMRC doesn’t recognise a “free gift.” It says, “Fine — you’ve given it away, but we’ll treat it as though you sold it for what it’s worth today.”

That means:

• Capital Gains Tax (CGT): you’re taxed as if you’d sold the asset at its market value. If it’s gone up in value, there’s a gain to account for. Holdover relief can sometimes defer this tax, but it only applies to certain types of trusts (mainly discretionary trusts and trusts for disabled beneficiaries), and it has to be actively claimed.
• Inheritance Tax (IHT): the value of what you’ve given away counts towards your lifetime allowance (the nil-rate band). Go over that, and there can be a 20% lifetime IHT charge.

A good way to think about it is to imagine you actually sold the property at full market price, and then immediately used the proceeds to set up the trust.

Ask yourself:

• What taxes and selling costs would I face as the seller?
• What costs, tax, or stamp duty would I face as the buyer (the trust or the trustees)?

Those combined costs are what come out of the overall “pot” when assets move into trust.

Stage 2: What Happens In the Middle

Once the assets are sitting inside the trust, three things usually happen: they’re protected, they grow, and they (hopefully) earn some income.

That protection piece is one of the biggest benefits — assets inside a trust can be sheltered from future claims, divorce, or simply from being spent too quickly. But while the protection stays constant, the way growth and income are taxed depends entirely on the type of trust you’re dealing with.

Inside a Pension – If those same assets — cash, property, shares — are sitting inside a pension trust, the growth is tax-free. A rental property held within a pension doesn’t pay tax on its rent or on any increase in value. You only pay tax when you draw the money out, not while it’s growing.

Inside a Family or Flexible Trust – Now imagine those same assets held in a family trust. Here, the tax treatment changes completely.

Any income the trust earns — rent, dividends, or interest — is taxed each year, usually at higher rates than individuals pay. And when the trustees sell something that’s gone up in value, they can face Capital Gains Tax.

There’s also the so-called ten-year charge, a small inheritance tax check-in every decade to make sure the trust isn’t quietly building a fortune outside the tax net. The maximum rate is 6%, but in practice it’s usually much lower — often around 1-2% depending on when the charge occurs and the trust’s history.

So while assets in a pension can grow completely tax-free, assets in a flexible or family trust grow within a taxable “wrapper”. They still enjoy the benefit of protection and controlled ownership, but they need active management to stay tax-efficient.

Stage 3: Getting Stuff Out of the Trust

At some point, what’s in the trust usually comes out — whether that’s money paid to you from your pension, a life insurance payout to your family, or assets being passed on from a family trust.

Pensions – the delayed tax bill

You got tax relief on the way in, enjoyed tax-free growth while it sat in the pot, and now the bill lands when you take the money out.

Normally, 25% of your pension pot can be taken tax-free. The rest is taxed as income when you draw it — but often at lower rates if you take it gradually in retirement.

If you die before touching your pension, the tax treatment for your beneficiaries depends on your age at death:

• Die before age 75: beneficiaries can usually draw the funds tax-free
• Die after age 75: beneficiaries pay income tax on withdrawals at their own marginal rate

Life Insurance – the clean payout

If your life policy was written in trust, the payout goes straight to your beneficiaries without going through your estate. That means no probate delay and, usually, no inheritance tax. The beneficiaries simply receive the money — no income tax, no capital gains tax.

Family or Flexible Trusts – the managed handover

This is where things get more involved. When trustees start paying out money or assets, HMRC takes another look.

If the trust sells an asset to make a cash payment, there might be Capital Gains Tax on the sale.

If the payment represents income, it’s already been taxed once in the trust, but the beneficiary may still need to include it on their tax return — often with a credit for the tax the trust has already paid.

If the assets themselves are handed over (say, a property or shares), there can be Capital Gains Tax again, though holdover relief may allow the gain to pass to the beneficiary instead of being paid immediately (again, only for qualifying trusts).

Some trusts face a small exit charge for inheritance tax when assets come out — usually only a few percent and often avoidable with good timing and advice.

Stage 4: Inheritance Tax – Who’s in the Firing Line?

If there’s one thing that links every type of trust, it’s the way the inheritance tax rules follow the settlor — the person who puts the money or assets in — long after they’ve given them away.

Pensions – usually outside your estate (but changes are coming)

One of the biggest advantages of pensions is that, for inheritance tax, they currently sit outside your estate. Your beneficiaries inherit directly based on your expression of wishes, normally without any inheritance tax to pay. The only tax they may face is income tax when they withdraw funds, depending on your age at death (as explained earlier).

However, the landscape is shifting. From April 2027, new rules will apply to pension death benefits. The broad direction of travel has been announced, but the detailed legislation isn’t finalised yet. The intention is to bring certain larger, largely untouched pension pots more clearly within the inheritance tax framework. We don’t yet know exactly how far these changes will reach, so it’s an area to keep under review as the rules develop.

Life Insurance – outside your estate if written in trust

A life policy written in trust sits outside your estate. If it’s not in trust, the payout can add 40% to your IHT bill.

Jointly Owned Property – depends how it’s held

For couples owning their home as joint tenants, the property automatically passes to the surviving partner — so no IHT is triggered on first death (it’s covered by the spouse exemption).

But if your spouse is no longer your spouse — for example, you’re separated or divorced but still own the property as joint tenants — it still passes automatically on death, and the former partner could end up inheriting everything.

Family or Flexible Trusts – where the clocks start ticking

When you place assets into a trust, HMRC treats it as a chargeable lifetime transfer. If the total of gifts in the previous 7 years plus the new one is under your nil-rate band, there’s no tax. Go over that, and there’s a 20% lifetime IHT charge.

Here’s where it gets a bit complex: when you make a new gift or transfer into trust, HMRC looks back 7 years to see if you made any other gifts that used up some of your nil-rate band. This means that theoretically, a gift made today could be affected by gifts made up to 14 years ago (if you made a gift 7 years ago, and that gift was assessed by looking back another 7 years). It’s not quite a “14-year lookback” — more like a rolling 7-year window that can create a chain effect.

Once assets have been in trust for 7 years (and you don’t benefit from them), they’re outside your estate for IHT. The trust itself then faces small ten-year and exit charges instead.

Beneficiaries – what they actually inherit

Beneficiaries generally don’t pay IHT when they receive money or assets from a trust — the tax is handled earlier, when assets go in or during the trust’s life.

For pensions and life insurance, there’s usually no IHT at all, but income tax may apply when funds are drawn.

When Trusts Aren’t the Answer

It’s worth remembering that trusts aren’t always the right solution. They come with ongoing responsibilities: someone has to act as trustee, manage the assets, file tax returns, keep records, and make decisions about distributions. That’s a real commitment, and it comes with legal responsibilities too.

Trustees can be personally liable if they get things wrong, so taking on the role isn’t something to do lightly. Many people appoint professional trustees for peace of mind, but that adds to the cost.

Sometimes, simpler solutions work better — a well-drafted will, clear beneficiary nominations, or just gifting money directly. The key is understanding what you’re trying to achieve and whether a trust is genuinely the best tool for the job. After all, every little thing (Bob Marley) doesn’t need a trust wrapper — sometimes simple really is better.

Trust Jargon – Decoded

There’s no escaping it — trusts come with their own language. Here’s a quick guide to the key terms you’ll bump into:

The Takeaway

Trusts are everywhere — in your pension, your home, your life insurance, even your investments.

The key is to recognise the trusts you already have, and think about whether there are other places where a trust could work for you — like making sure your life insurance is written in trust, or deciding whether your will should create one to protect loved ones after you’re gone.

Remember, though, a trust doesn’t run itself. Someone has to manage it, file the tax returns, and make decisions about distributions. And most trusts now need to be registered with HMRC, even if there’s no tax to pay.

That’s why setting up a trust — or deciding not to — should never be done in isolation.

Good planning means looking at your whole picture — your age, wealth, relationships, goals, and future plans. The right trust (or none at all) depends on you.

So here’s what to do next:

• Check whether your life insurance is written in trust (and if it is, whether it’s been registered)
• Review your pension’s expression of wishes — is it up to date?
• If you own property jointly, confirm whether you’re joint tenants or tenants in common
• Consider whether any existing family trusts are still doing what you intended

So before you jump in, make sure you understand the ones already around you — and get advice that looks at the full context, not just the word “trust”.

And in the End…

Trusts can look complicated — but like most things in life, once you strip out the jargon, they’re just about people, protection, and planning ahead.

They’re the unsung heroes quietly working in the background of your pension, your home, and your insurance policy. The real trick is knowing when to use one on purpose — and when you already have one without realising.

So take a little time to check what’s sitting in your own “trust box”, and whether it’s working the way it should.

Because when it comes to your future — and your family’s — you’ve got to have faith (George Michael), make sure you don’t stop believin’ (Journey), and remember that good planning is all about trusting the process (Drake).