Trust funds

A trust fund is where someone places money or assets into a legal arrangement known as a trust, which is then managed by trustees for the benefit of beneficiaries. While they’re sometimes thought of as a financial product for the wealthy, trusts can also be used to support someone who is unable to manage their finances. On this page, you’ll learn how trust funds work, the different types of trusts in the UK, and how to set up a trust fund.

The information provided here is for informational and educational purposes only and does not constitute financial advice. Please consult with a licensed financial adviser or professional before making any financial decisions. Your financial situation is unique, and the information provided may not be suitable for your specific circumstances. We are not liable for any financial decisions or actions you take based on this information.

In simple terms, a trust fund is an agreement where a person or group of people have control over assets or cash on someone else’s behalf. For example, your grandfather could give money or assets intended for you to your father, who then passes it on to you with instructions on how he wants you to spend it. In a trust, this agreement is legally binding to ensure you comply with your grandfather’s original wishes (this example is illustrative only).

In every trust fund, there are three main players:

• The settlor: this is the person who establishes the trust fund and transfers their property, money, investments, or any other valuable assets into the trust. The settlor is responsible for deciding how to distribute the assets, and they stipulate the trust fund’s management terms in a legal document known as the trust deed.

• The beneficiary: the person who benefits from the trustor for whom the fund was initially established. The beneficiary is granted access to the assets in the trust, but they don’t legally own the assets until they are distributed. The asset or assets within the trust are managed by the trustee(s) for the benefit of the beneficiary.

• The trustee: a trustee can be a single individual, an institution such as a bank or solicitor firm, or multiple trusted advisers, depending on the settlor’s preferences. A settlor could also act as a trustee, which is common within family trusts. Trustees are responsible for making sure the trust fund follows the duties set out in legally binding trust documents, usually called the trust deed.

A trust fund allows the settlor to set rules on how and when their assets will be passed on to beneficiaries they select. For example, they may want to leave money to grandchildren but prevent wasteful spending. As the settlor, they can dictate the rules of the trust - one of which may require grandchildren to be of age before benefitting from the assets. They could also designate funds to a specific purpose, such as education fees. These rules are ultimately dependent on the type of fund chosen.

The following are the main types of trusts in the UK:

• Bare trusts – Assets placed in a bare trust are held in the trustee’s name , but the beneficiary will have the right to all the assets in the fund once they reach the age of 18 (or 16 in Scotland). This means assets set aside as the settlor will go directly to the beneficiary.

• Interest in possession trusts – Aside from any incurred expenses, the beneficiary of an interest in possession trust has a right to the income from the trust. Sometimes the income is paid directly, other times it’s reinvested on the beneficiary’s behalf.

• Discretionary trusts – In this type of trust, the settlor allows their trustees to make decisions about how they use trust income and capital. Depending on what the settlor states in the trust deed, trustees can decide what gets paid out, who it gets paid to, how often payments can be made, and any other requirements that must be met.

• Accumulation trusts – A settlor can allow trustees to accumulate income within the trust and add it to the capital. Trustees may be able to pay income if permitted to do so in the trust deed.

• Mixed trusts – These combine elements of one or more types of trust, with each part taxed according to its own rules. Part of the trust might provide income immediately to a beneficiary (like an interest in possession trust), while another part might give the trustee freedom to decide how to distribute income or capital (like a discretionary trust).

• Settlor-interested trusts – In this type of trust, the settlor (or their spouse or civil partner) is the beneficiary. HMRC applies specific tax rules here, as the income is generally treated as the settlor’s own.

• Non-resident trusts – This kind of trust involves trustees who aren’t based in the UK for tax purposes. The tax rules for this type of trust tend to be very complicated.

Please note that tax treatment is partially dependent on individual circumstances and guidance may change. Find out more about inheritance planning.

In the UK, the word trust fund is sometimes used to describe a Child Trust Fund (CTF). A CTF is technically a government savings account rather than a trust in the legal sense, however. The scheme was for children born between 2002 and 2011. The money belongs to the child and they can manage the account from 16, but they can’t withdraw it in full until they turn 18. The Child Trust Fund scheme is now closed, but HMRC offers guidance for finding an existing Child Trust Fund. Funds may be transferred to a Junior ISA in some cases.

Trust funds offer a way to pass on assets to heirs without going through probate, the legal process of administering someone’s estate, paying debts, and distributing assets according to a will.

People in the UK commonly use trusts to:

• Provide for children or vulnerable family members

• Protect assets in case of divorce or bankruptcy

• Protect assets from financial mismanagement

• Control how and when beneficiaries receive money or property after your death

• Support charitable causes

• Manage estate planning and, in some cases, help with tax planning (though UK trusts are subject to their own tax rules)

As always, your own circumstances are individual and some people prefer to enlist the advice of a qualified tax adviser on this matter. The above information does not constitute any form of advice or recommendation.

The main disadvantage of trust funds is the cost and effort involved in the initial set-up of the trust. It generally takes a lot of preparation and can incur considerable legal fees. And even after it’s set up, the trustee must take care of ongoing administrative tasks, including managing the assets and filing tax returns. A trust fund is legally binding, which means you may not be able to get your assets back once you’ve placed them into a trust.

Taxes apply based on the trust fund you choose, as each type of trust is taxed differently. 

For example, in accumulation or discretionary trusts, trustees are responsible for paying tax on the income received. The first £500 is tax-free. If you have more than one type of trust fund, however, then the £500 will be divided between the number of trust funds you have.

The tax rates for accumulation or discretionary trusts are below:

Dividend-type income: 39.35%All other income: 45%

With interest in possession trusts, the trustee pays income tax of 8.75% on dividends and 20% on other income. For bare trusts, the beneficiary is treated as the owner for tax purposes, and pays tax at their personal rate. There is also capital gains tax to consider, which is a tax on the profit when a trust sells an asset for more than it paid. However, trusts get a small annual exemption of £1,500 (2025/26). A final inheritance tax may be incurred on the value of the trust’s assets when someone dies.

The person in charge of maintaining the trust must register the trust with HMRC and keep the Trust Registration Service updated, as well as complete annual tax returns and accounts. Because tax rules for trusts can be complex and subject to change, a tax adviser can provide assistance. The official UK government page provides the latest rates.

(Taxation rates listed in this article are subject to change)

Identifying what type of trust is best for you and your personal circumstances is the first step in setting up a trust fund. While procedures vary based on the particular type of trust, setting up a trust commonly involves:

1. Declaring assets: Listing all the different assets within the trust, along with their value.

2. Appointing trustees: Selecting an individual or individuals to manage assets, or identify a management company that will bear the legal authority to control assets.

3. Determining beneficiaries: This involves creating a list of beneficiaries to benefit from the trust. The settlor may also specify a percentage for how much of each asset the beneficiaries are entitled to receive.

4. Outlining terms: This focuses on the trust deed composition, which is the legal document that prescribes any rules set up to govern the fund and empower the trustees.

5. Transferring assets: Move the declared assets into the trust so it becomes legally effective.

The cost of setting up a trust depends on the type of trust and how complex it is. Solicitor fees may need to be factored in, as well as the cost of drafting a trust deed. Using a solicitor can ensure the trust is legally tight. Some charities offer financial support for families setting up a trust for a child with a disability.

There may be ongoing fees from professional trustees once the trust is established. For smaller or simpler trusts, a fixed fee may be sufficient. Larger or more complex trusts may entail charges based on the time spent managing the trust.

If you’re thinking about building up a pot of funds for the future, whether for yourself or for passing on to someone else, a lump sum savings account can offer competitive rates.

If you want to quickly and easily open a savings account, register for a Raisin UK Account.