How to Set Up a Trust in the UK: Step by Step Legal and Tax Guide

SETTING UP A TRUST

Setting up a trust can be an effective way to protect assets, manage wealth across generations, and provide for beneficiaries in a controlled and tax-efficient manner. However, establishing a trust requires careful planning, legal drafting, and consideration of tax implications. Our solicitors can support you throughout this process to ensure the trust is set up correctly and optimised for your needs.

Below is a brief overview of the key steps involved, together with links to the main types of trusts commonly used in the UK.

1. Define the Purpose of the Trust

Before creating a trust, you must clearly identify its objective. Common purposes include:

• Providing for minor children
• Protecting vulnerable beneficiaries
• Managing business or family wealth
• Mitigating inheritance tax (IHT) exposure
• Preserving assets on remarriage

The purpose will influence which type of trust is most suitable.

2. Choose the Appropriate Type of Trust

Different structures offer various levels of control, flexibility, and tax treatment. Common types include:

• Bare trust – Beneficiaries have an immediate and absolute right to both capital and income. Often used for children.
• Interest in possession trust – A beneficiary has a right to income during their lifetime, with capital passing to others later.
• Discretionary trust – Trustees have discretion over distributions. Offers flexibility and asset protection.
• Life interest trust – A form of interest in possession trust for lifetime beneficiaries.
• Vulnerable beneficiary trust – Designed for disabled or vulnerable individuals and may receive favourable tax treatment.

Selecting the right structure is critical, as tax treatment (including IHT, income tax, and capital gains tax) varies significantly between trust types. Our solicitors can help you assess which trust best meets your goals.

3. Appoint Trustees

Trustees are responsible for managing the trust in accordance with the trust deed and in the beneficiaries’ best interests. When appointing trustees, consider financial competence, impartiality, and willingness to act. Professional trustees can also be appointed if needed.

4. Draft the Trust Deed

The trust deed is the legal document that:

• Establishes the trust.
• Names the trustees and beneficiaries
• Sets out trustee powers.
• Defines how income and capital may be distributed.

Accurate drafting is essential and where our solicitors provide expert support to ensure the document reflects your intentions and minimises tax risk.

5. Transfer Assets into the Trust

Assets such as cash, property, and investments must be formally transferred into the trust. Depending on the trust type and value, this can trigger tax considerations, and professional guidance helps manage these effectively.

6. Register the Trust

Most trusts must be registered with HMRC’s Trust Registration Service (TRS). Registration deadlines vary, and failure to comply can lead to penalties, a process our solicitors can assist you with.

7. Ongoing Administration and Compliance

After creation, trustees must:

• Keep accurate records.
• Submit tax returns where required.
• Manage investments prudently.
• Review the trust periodically.

Certain trusts face periodic IHT charges every 10 years and exit charges when assets leave the trust, areas where ongoing professional advice is invaluable.