The UK’s tax code system is notoriously complicated. Indeed, now standing at over 21,000 pages, our code is the longest in the world. Little wonder people feel confused!
This is especially true when it comes to estate planning, and trusts in particular. How does a trust work, exactly? Can it help you avoid inheritance tax (IHT)? What are the different types?
In this guide, we cover the trust essentials you need to know in 2025. We mention some of the recent/upcoming changes to be aware of, and offer ideas on how to mitigate needless taxes as you plan your legacy.
What is a Trust?
A trust is a clever “legacy structure” that allows you (the “settlor”) to move things you own (i.e. assets, like savings) into it. From there, the trustees hold and manage those assets for you – on behalf of the people you eventually want to receive them (your “beneficiaries”).
This is different from an outright gift between you and, say, your child. The latter could then do what they please with it (despite your clear instructions!). However, a trust can enable greater control over what your beneficiaries inherit, when and for what purposes.
A trust is also different from a will. The latter takes effect upon your death, detailing how you want your estate to be distributed.
A trust, however, can operate during your lifetime or after your passing. This can be especially useful for dealing with matters that cannot wait too long (e.g. immediate solutions for tax efficiency, asset protection, or supporting vulnerable relatives).
Tax and Legal Considerations in 2025
IHT in the UK is notoriously complex. This can be a challenge (a DIY approach could lead to costly mistakes in estate planning), but also an opportunity – i.e. various allowances and rules can be used to your advantage.
This is especially the case in 2025 regarding trusts. The standard nil-rate band (NRB) remains at £325,000 per individual — meaning your estate up to this value can be passed to beneficiaries free from Inheritance Tax (IHT) upon death. In addition, the Residence Nil Rate Band (RNRB) continues to apply, allowing an extra allowance (currently up to £175,000 per person) when passing on a main residence to direct descendants, potentially increasing the total tax-free threshold for an individual’s estate to £500,000.
However, this threshold has been “frozen” until 2030, despite the rising value of property and other assets. As such, many family homes stand to fall into the IHT “net” when the time comes to pass them down to loved ones.
Here, trusts can play a valuable role in estate planning. For instance, a discretionary trust could control how and when certain assets are transferred (e.g. before death). However, structuring is essential – and compliance is ever more vital with today’s tightening reporting requirements.
For instance, in certain cases, trustees are required to register with the Trust Registration Service (TRS). Preparations must be made to face anti-money laundering checks, making accurate record-keeping essential.
Indeed, trusts can become problematic if poorly set up or maintained. Common errors include:
- Failing to account for periodic tax charges (e.g. the ten-year anniversary charge).
- Appointing unsuitable trustees.
- Overlooking changes in family circumstances (e.g. divorce).
- Setting up the wrong type of trust (this can inadvertently increase a tax liability rather than reduce it).
On the latter point, it’s important to be aware of the different types of trust. Each one is designed to account for specific circumstances, goals and estate planning requirements:
- Bare Trusts. Could be seen as the simplest type of trust – i.e. trustees hold the assets, but beneficiaries have the absolute right to both the income and capital after 18 (or 16 in Scotland).
- Discretionary Trusts. More complex – trustees decide how and when to distribute income or capital among a group of beneficiaries. Offers flexibility and strong asset protection.
- Interest in Possession Trusts. These allow a beneficiary to receive income generated by the trust (e.g., rental income or dividends), but not necessarily the underlying capital.
- Accumulation and Maintenance Trusts. These let trustees accumulate income within the trust and later apply it for the maintenance, education or benefit of the beneficiaries (often children or young adults).
- Mixed Trusts. Combine elements of more than one type of trust (e.g., part discretionary, part interest in possession).
- Settlor-Interested Trusts. These let the settlor or their spouse/civil partner benefit from the trust’s assets. These attract specific tax rules.
- Charitable Trusts. These are set up to benefit a charity or the public, enjoying special tax exemptions.
- Trusts for Vulnerable Beneficiaries. Specifically designed for beneficiaries who are disabled or otherwise vulnerable, offering potential favourable tax treatment and extra protection.
Final Thoughts
A trust can feel complex at first glance, but with the right advice, it can be a powerful tool in your wider estate plan.
The benefits can include: protecting your wealth, reducing tax exposure, ensuring your legacy is managed exactly as you intend, and more.
In 2025, the role of trusts in estate planning has never been more important, especially in light of frozen IHT thresholds, stricter reporting requirements, and rising asset values. From April 2027, pensions (or unused pension pots/death benefits) are also planned to be brought into the IHT net (i.e. counted in the deceased’s estate) – closing a “pension loophole.”
With professional guidance, you can avoid the common pitfalls, maximise available allowances and put in place a plan that truly futureproofs your estate.
If you’d like to make sure you’re taking the right steps to safeguard your estate and financial future, please get in touch.
The content in this article was correct on 24/10/2025.
The value of your investment can go down as well as up and you may get back less than the amount invested
The Financial Conduct Authority does not regulate Tax/Estate Planning and Trusts
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