Family Trusts for Wealth Protection
How family trusts can protect assets, reduce inheritance tax, and provide structured wealth transfer to future generations.
What is a Family Trust?
A family trust (technically a "discretionary trust" or "settlement") is a legal arrangement where assets are transferred to trustees, who hold and manage them for the benefit of named beneficiaries — typically family members. The person who puts assets into the trust is called the "settlor". The trustees manage the assets according to the trust deed. Beneficiaries receive income or capital from the trust at the trustees' discretion.
Why Use a Family Trust?
Family trusts are used for a range of financial planning purposes: • Inheritance Tax (IHT) planning: assets transferred into trust may fall outside your estate for IHT purposes after seven years • Asset protection: trust assets can be protected from bankruptcy, divorce settlements, or future creditors • Income splitting: income can be distributed to beneficiaries in lower tax brackets • Succession planning: control who benefits and when — useful for protecting children or vulnerable family members • Capital Gains Tax deferral: gifts into trust can use hold-over relief
Inheritance Tax and Trusts
Transfers into a discretionary trust are treated as "chargeable lifetime transfers" (CLTs): • Gifts up to £325,000 (the nil-rate band) can be transferred free of IHT • Gifts exceeding this attract IHT at 20% on the excess (at the time of transfer) • If the settlor dies within 7 years, additional IHT may be due • Every 10 years, a trust faces a periodic charge of up to 6% on the value above the nil-rate band • Exit charges apply when assets leave the trust For assets like a family home, the Residence Nil-Rate Band (RNRB) is generally not available when a property is held in trust.
Income Tax in Trusts
Trusts pay income tax at specific rates: • The first £1,000 of trust income is taxed at the basic rate (20% for non-savings income) • Income above £1,000: 45% for non-dividend income; 39.35% for dividends When income is distributed to a beneficiary, they can reclaim tax if they are a non- or basic-rate taxpayer. The trust pays the tax at the higher rate and provides a certificate; the beneficiary uses this to recover overpaid tax from HMRC.
Capital Gains Tax in Trusts
Trusts have their own CGT annual exempt amount — currently £1,500 (half of the individual exemption). Gains within a trust are taxed at 24% (or 18% for basic-rate trusts) from 2025/26. Hold-over relief can be used when assets are transferred into or out of a trust, deferring CGT until the asset is eventually sold by the beneficiary.
Administration and Compliance
Trusts have ongoing compliance obligations: • Annual self-assessment tax return for the trust (SA900) • Registration with HMRC's Trust Registration Service (TRS) — most trusts must register • Trustees have fiduciary duties and must act in the best interests of beneficiaries • Proper trust accounts should be maintained The administrative burden and associated costs should be weighed against the planning benefits before establishing a trust.
Trust Tax Rates 2025/26
Considering a Family Trust?
We can assess whether a trust is right for your situation and help with setup and ongoing compliance.
Get Expert Advice