An introduction to trusts

Price Mann • October 18, 2023

An introduction to trusts

What you need to know about trusts, including how they are taxed.

Trusts are legal arrangements where assets are placed into the care of an individual or organisation that manages them for the benefit of someone else.

For the person setting up the trust, this arrangement means they know their assets will be properly looked after until they come under the legal control of the beneficiaries.

Crucially, there are also tax advantages to setting aside assets in a trust, especially in the context of estate planning.

That’s why we want to go over them with you.

What are trusts?

A trust is a relationship between three parties:

he settlor is the person who places the assets in the trust
the beneficiary is the person who benefits from the assets in the trust
the trustee is the person or organisation appointed to manage the trust on behalf of the settlor and beneficiary.

So, in a trust, the settlor gives over the financial management of selected assets and capital to the trustee(s).

Depending on the terms of the arrangement, generated income from the assets or the assets themselves will go to the beneficiary — often a younger person or someone who is unable to care for their own finances at present.

As a general rule, anyone over the age of 18 can be a trustee, but some solicitors and accountants also have trustee services.

It’s also worth noting that these three parties aren’t always different people: it’s fairly common for the trustee and settlor to be the same person. In some cases, settlors can even be their own beneficiaries.

Types of trusts

There are many different types of trusts, which all work in their own way. They include:

Bare trusts — assets placed in a trust are held in the name of a trustee, yet the beneficiary has the right to all trust capital and income when they turn 18 (or 16 in Scotland).
Interest in possession trusts — the beneficiary receives income generated by the trust but is not entitled to the underlying assets.
Discretionary trusts — the trustees have absolute power over how the trust assets are used and distributed. Very popular with grandparents, who often name their grandchildren as the beneficiaries and their children as the trustees.

Knowing which type of trust is right for you can be difficult.

Talk to us, and we’ll help you decide the route to take.

Income tax

Trustees or beneficiaries may be responsible for paying tax on the income from trusts; the amount due depends on the type of trust.

For accumulation or discretionary trusts, the first £1,000 of dividend-type income is taxed at 8.75%, while the first £1,000 of all other income is taxed at 20%.

Above that amount, dividend income is taxed at 39.35%, while all other income is taxed at 45%.

When it comes to the tax treatment of interest in possession trusts, dividend-type income is usually taxed at 8.75%, with all other income taxed at 20%.

Sometimes, though, the trustees ‘mandate’ the income to the beneficiaries, meaning it goes to them directly. In this case, the beneficiary would need to include the income on their self-assessment tax return.

Beneficiaries of bare trusts are responsible for filing a self-assessment tax return and paying tax on income.

If you’re a beneficiary of income from a discretionary trust, you are deemed to have received it net of 45% tax – but you can reclaim the difference if you fall into a lower tax bracket.

Similarly, for an interest in possession trust, there may be additional tax reclaimable or payable by the recipient. The trust will have paid income tax at 8.75% or 20% but if the taxpayer’s effective tax rate is different to this, they will pay or reclaim the difference.

Capital gains tax

Capital gains tax (CGT) is usually paid on the profit that is created by selling an asset for more than you bought it for. It can also apply when you give an asset away or transfer it to someone else.

CGT may need to be paid when:

assets are put into or taken out of a trust
a beneficiary gains access to the assets in the trust
the trustee is no longer a resident in the UK

There are, however, some instances when an asset can be moved but CGT is not liable.

Firstly, if a person dies and they leave their assets to the beneficiary, there is no CGT liability.

Likewise, there is no charge if a beneficiary of an interest in possession trust dies and the assets are passed to someone else.

There are some allowable costs that can be deducted when working out a trust’s CGT liability, as well as specific reliefs. Be sure to get professional advice to find out which of these apply to you.

Inheritance tax

Trusts can be great for estate planning because of how inheritance tax is applied to the value of assets and capital held in trusts.

For the majority of trusts, inheritance tax will be due if transfers into them exceed the threshold of £325,000 at 20% — in contrast to the regular 40%.

If you die within seven years of making a transfer into a trust, your estate will have to pay inheritance tax at the full amount of 40%.

If no tax is due, the value of the transfer is added to your estate.

If you make a gift into any type of trust but continue to benefit from it (for example, you give away your house but continue to live in it), you’ll have to pay 20% on the transfer and the gift will count as part of your estate.

There are potential ways to negate this, such as having the settlor pay rent on the property while they live there, but be sure to seek advice if you’re considering this.

An inheritance tax exit charge also applies to most transfers of capital out of a trust, up to a maximum of 6%.

A transfer out of a trust can occur when:

the trust comes to an end
some of the assets within the trust are distributed to beneficiaries
a beneficiary becomes ‘absolutely entitled’ to enjoy an asset
an asset becomes part of a ‘special trust’ (for example, a charitable trust or trust for a disabled person) and it ceases to be ‘relevant property’
the trustees enter into a non-commercial transaction that reduces the value of the trust fund.

10-year anniversary

On the day before each ten-year anniversary of the trust, inheritance tax is charged on the net value of the relevant property in the trust.

The way this charge is calculated is complex, so get in touch with us for more technical information.

If the beneficiary dies

A trust's assets or income will be distributed if a beneficiary dies, depending on the type of trust.

For example, because beneficiaries are entitled to both the income and assets of a bare trust, this becomes part of their estate when they die.

This is not usually the case with interest in possession trusts, as beneficiaries are only entitled to the income generated by the trust.

There are certain circumstances where the value of this type of trust is added to the deceased beneficiary’s estate.

Get in touch for advice on trusts and inheritance tax.

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Managing risk in your investment portfolio

By Price Mann • September 17, 2025

Managing risk in your investment portfolio Tips for a balanced investment approach. Investment markets rise and fall, yet the goals that matter to you – retirement security, children’s education, a comfortable buffer against the unexpected – remain constant. Managing risk means giving each goal the best chance of success while avoiding avoidable shocks. You can do that by holding the right mix of assets for your timeframe, using tax wrappers efficiently, and controlling costs and emotions. The 2025/26 UK tax year brings unchanged ISA and pension allowances. This guide explains the key steps, such as diversifying sensibly, rebalancing with discipline, safeguarding cash, and monitoring allowances, so you can stay on track whatever the markets deliver. It is an information resource, not personal advice. Start with a clear plan Define goals and timeframes: Decide what each pot of money is for (for example: house deposit in three years, retirement in 20 years). Time horizon drives how much short-term volatility you can accept. Short-term goals usually need more cash and high-quality bonds; long-term goals can justify more equities. Set your risk level in advance: Ask yourself two questions. Risk capacity: How much loss could you absorb without derailing plans (linked to your time horizon, job security and other assets)? Risk tolerance: How do you feel about market swings? Use a more cautious mix if you are likely to sell in a downturn. Ring-fence cash needs: Keep 3-6 months’ essential spending in easy-access cash before you invest. This reduces the chance of selling investments at a low point to meet bills. Choose simple, diversified building blocks: Broad index funds and exchange-traded funds (ETFs) covering global equities and high-quality bonds provide instant diversification at low cost. Avoid concentration in a single share, sector or theme unless you are comfortable with higher risk. Diversification: Spread risk across assets, regions and issuers Diversification reduces the impact of any single holding. Practical ways to diversify include the following. Assets: Use both growth assets (equities) and defensive assets (investment-grade bonds, some cash). Regions: Combine UK and global holdings. Many UK investors hold too much domestically; global funds spread company and currency risk. Issuers: In bonds, mix UK gilts and investment-grade corporate bonds to diversify credit exposure. Currencies: Equity funds are commonly unhedged (currency moves add volatility but can offset local shocks). For bonds, many investors prefer sterling-hedged funds to lower currency risk. A diversified core helps the portfolio behave more predictably across different market conditions. You can add small “satellite” positions if you wish, but keep any higher-risk ideas to a modest percentage of the whole. Use tax wrappers to reduce avoidable tax and trading frictions Efficient use of ISAs and pensions is one of the most effective risk-management tools because it protects more of your return from tax. ISAs (individual savings accounts) Annual ISA allowance: £20,000 for 2025/26. You can split this across cash, stocks & shares and innovative finance ISAs. Lifetime ISAs (LISAs) are capped at £4,000 within the overall £20,000. Junior ISA (for children under 18): £9,000 for 2025/26 (unchanged). ISAs shield interest, dividends and capital gains from tax. Rebalancing inside an ISA does not create capital gains tax (CGT), which helps you maintain your chosen risk level at lower cost. Note: There has been public discussion about potential ISA reforms, but the current 2025/26 allowance is £20,000. If government policy changes later, we will let you know. Pensions (workplace pension, personal pension/SIPP) Annual allowance: £60,000 for 2025/26 (subject to tapering for higher incomes; see below). You may be able to carry forward unused annual allowance from the three previous years if eligible. Tapered annual allowance: If your adjusted income exceeds £260,000 and threshold income exceeds £200,000, the annual allowance tapers down (to a minimum of £10,000 for 2025/26). Money purchase annual allowance (MPAA): £10,000 for 2025/26 once you’ve flexibly accessed defined contribution benefits (for example, taking taxable drawdown income). Tax-free lump sum limits: The lifetime allowance has been replaced. From 6 April 2024, the lump sum allowance (LSA) caps total tax-free pension lump sums at £268,275 for most people, and the lump sum and death benefit allowance (LSDBA) is £1,073,100. Pensions are long-term wrappers designed for retirement. Contributions usually attract tax relief and investments grow free of UK income tax and capital gains tax while inside the pension. Personal savings: Interest allowances Personal savings allowance (PSA): Basic-rate taxpayers can earn up to £1,000 of bank/building society interest tax free; higher-rate taxpayers up to £500; additional-rate taxpayers do not receive a PSA. Starting rate for savings: Up to £5,000 of interest may be taxable at 0% if your other taxable non-savings income is below a set threshold. For 2025/26, that threshold is £17,570 (personal allowance of £12,570 plus the £5,000 starting rate band). Dividends and capital gains outside ISAs/pensions Dividend allowance: £500 for 2025/26 (unchanged from 2024/25). Dividend tax rates remain 8.75%, 33.75% and 39.35% for basic, higher and additional-rate bands, respectively. The annual capital gains tax (CGT) exempt amount , £3,000 for individuals (£1,500 for most trusts). CGT rates from 6 April 2025: For individuals, 18% within the basic-rate band and 24% above it, on gains from both residential property and other chargeable assets (carried interest has its rate). HMRC examples confirm the £37,700 basic-rate band figure used in CGT calculations for 2025/26. CGT reporting reminder: UK residents disposing of UK residential property with CGT to pay must report and pay within 60 days of completion. Other gains are reported via self assessment (online filing deadline is 31 January following the tax year; if you want HMRC to collect through your PAYE code, file online by 30 December; payments on account remain due 31 January and 31 July). Why this matters for risk: Using ISAs and pensions lowers the drag from tax, allowing you to rebalance and compound returns more effectively. Outside wrappers, plan disposals to use the £3,000 CGT allowance and each holder’s tax bands and consider transfer to a spouse/civil partner (no CGT on gifts between spouses) before selling where suitable. Bonds and cash: Interest-rate and inflation considerations Interest rates: The Bank of England reduced the Bank Rate to 4% at its August 2025 meeting. Bond prices can move meaningfully when rates are high or changing, especially for longer-dated bonds. Consider the duration of bond funds and whether a mix of short- and intermediate-duration exposure suits your time horizon. Inflation: Headline Consumer Price Index (CPI) inflation was 3.6% in the 12 months to June 2025, while the CPI including owner occupiers’ housing costs (CPIH) rose by 4.1%. Inflation affects the real value of cash and bond coupons, and can influence central bank policy, affecting bond prices. Review whether your mix of cash, index-linked gilts and conventional bonds remains appropriate as inflation and interest-rate expectations evolve. Cash strategy: For short-term needs, spread deposits to respect Financial Services Compensation Scheme (FSCS) limits. For longer-term goals, excessive cash can increase the risk of falling behind inflation. Control costs and product risk Keep fees low: Ongoing charges figures (OCFs), platform fees and trading costs compound over time. Favour straightforward funds and avoid unnecessary expenses. Understand the product: Structured products, highly concentrated thematic funds or complex alternatives can behave unpredictably. If you use them, size them modestly within a diversified core. Use disciplined trading rules: Avoid frequent tinkering. Set rebalancing points (see below) and resist acting on short-term news. Rebalancing: Why, when and how Markets move at different speeds. Without rebalancing, a portfolio can “drift” to a higher or lower risk level than you intended. Follow this simple rebalancing framework. Invest in something that will rebalance automatically (i.e. certain ETFs) Frequency: Review at least annually. Thresholds: Rebalance when an asset class is 5 percentage points away from target (absolute) or 20% away (relative). Tax-aware execution: I prefer to rebalance inside ISAs and pensions. Outside wrappers, use new cash or dividends where possible; then consider selling gains up to the £3,000 CGT allowance and factoring in dividend and savings allowances. Implementation tip: If markets are volatile, use staged trades (for example, three equal tranches a few days apart) rather than one large order. Safeguard cash and investments with the right protections FSCS protection (cash deposits): Up to £85,000 per person, per authorised bank/building society group is protected. Temporary high balances from specific life events can be covered up to £1m for six months. The Prudential Regulation Authority has consulted on raising the standard deposit limit to £110,000 and the temporary high balance limit to £1.4m from 1 December 2025 (proposal stage at the time of writing). FSCS protection (investments): If a regulated investment firm fails and your assets are missing or there is a valid claim for bad advice/arranging, compensation may be available up to £85,000 per person, per firm. This does not protect you against normal market falls. Operational risk checks: Use Financial Conduct Authority authorised providers, check how your assets are held (client money and custody), enable multi-factor authentication, and keep beneficiary and contact details up to date. Currency risk: When to hedge For equities, many long-term investors accept currency fluctuations as part of the growth engine, since sterling often weakens when global equities are stressed, partly offsetting losses. For bonds, many prefer sterling-hedged funds to keep defensive holdings aligned with sterling cashflow needs. A blended approach works: unhedged global equities plus mostly hedged bonds. Behavioural risks: Keep decisions steady Common pitfalls include chasing recent winners, selling after falls or holding too much cash after a downturn. Tactics to keep you on track include: automate contributions (regular monthly investing), which spreads entry points write down rules (what you will do if markets fall 10%, 20%, 30%) separate spending cash from investments so you do not sell at weak prices to fund short-term needs use portfolio “buckets” in retirement. Retirement planning: Sequence-of-returns risk and withdrawals If you are drawing an income from investments consider the following. Hold a cash buffer (for example, 12–24 months of planned withdrawals) to avoid forced sales during sharp market falls. Be flexible with withdrawals: Pausing inflation-indexing or trimming withdrawals after a poor market year can help portfolios last longer. Use tax bands efficiently: Consider the order of withdrawals (pension, ISA, general investment account) to make use of personal allowance, PSA, dividend allowance and the CGT annual exempt amount. Take care around the MPAA if you are still contributing to pensions after accessing them. Putting it together: A repeatable checklist Confirm goals and time horizons. Check emergency cash (3-6 months). Map your target asset allocation. Use wrappers first: Fill ISAs and workplace/personal pensions as appropriate. Keep costs low: Prefer broad index funds/ETFs. Set rebalancing rules: Annual review + thresholds. Document tax items: Monitor dividend/CGT use; note 60-day property CGT rule; plan for 31 January/31 July self assessment dates if relevant. Review protection limits: Spread larger cash balances across institutions in line with FSCS; note proposed changes for late 2025. Schedule an annual review to update assumptions for interest rates, inflation and any rule changes. Get in touch if: you are unsure how to set or maintain an asset allocation you plan to draw income and want to coordinate wrappers and tax bands you expect large one-off gains or dividends and want to plan disposals or contributions you have concentrated positions (employer shares, single funds) and want to reduce single-asset risk tax-efficiently you are considering more complex investments. Wrapping up Risk management is not a one-off task but an ongoing discipline. By defining clear objectives, spreading investments across regions and asset classes, using ISAs and pensions to shelter returns, and reviewing allocations at least annually, you create a framework that limits surprises and keeps decisions rational. Document key dates – self assessment payments on 31 January and 31 July, the 60-day CGT rule for property, and the annual ISA reset on 6 April – so tax never forces a sale at the wrong time. Check deposit limits and platform safeguards for peace of mind, and keep a written record of your rebalancing rules to prevent knee-jerk trades. If life events or regulations change, revisit your plan promptly. A measured, systematic approach lets your portfolio work harder while you stay focused on the goals that matter most. Important information This guide is information only and does not account for your personal circumstances. Past performance is not a guide to future returns. The value of investments and income from them can fall as well as rise, and you may get back less than you invest. Tax rules can change and benefits depend on individual circumstances. If you need personalised advice, please contact a regulated financial adviser. If you’d like advice on managing your portfolio, get in touch.