Trusts have long been a pillar of estate planning, offering control, protection, and powerful tax advantages when used correctly. But with ever-evolving tax rules and stricter reporting obligations, many high-net-worth individuals and families are asking: are trusts still worth it?
The answer is yes — but only if you understand how they work, stay within the rules, and manage them properly over time. In this article, we’ll explore:
- Why trusts are used in modern estate planning
- How trusts are taxed — including periodic and exit charges
- The importance of the Rysaffe principle, and how changes affect planning today
- How to keep trusts effective for the long term
If you’re looking to protect family wealth, avoid inheritance tax pitfalls, and ensure your money benefits the right people at the right time, this guide is for you.
Why Use a Trust?
While the technical setup of a trust can seem complex, the motivations are usually simple. People use trusts to protect wealth, control how it’s passed on, and reduce future Inheritance Tax (IHT) exposure. Here are two of the most common reasons:
1. Bloodline Protection
Placing assets in a trust ensures that wealth stays within your family. Rather than gifting assets outright — where they could be lost to divorce, remarriage, or poor decision-making — a trust ring-fences them. The trustees control how and when the money is distributed.
This is especially valuable if:
- You want to benefit children but protect against future ex-spouses
- A beneficiary is financially immature, vulnerable, or at risk of being influenced
- You want to preserve capital across generations
2. Inheritance Tax Planning
Trusts can help mitigate IHT, especially when set up correctly during your lifetime. Assets placed in most lifetime trusts are subject to IHT charges, but with good planning, these charges can be minimised or avoided entirely.
By moving money into trusts gradually over time — rather than leaving it all at death — you reduce the size of your estate and take advantage of individual nil rate bands (NRBs) effectively.
How Are Trusts Taxed?
It’s essential to understand how trusts are taxed in the UK. There are three main areas to be aware of:
1. Initial Charge on Lifetime Trusts
When you set up most types of lifetime trusts — such as a discretionary trust — you may face an entry charge if the amount settled exceeds the available NRB (£325,000 per person in 2025/26).
This charge is typically 20% on amounts above the NRB when the trust is created.
2. Periodic (10-Year) Charges
Every ten years, a trust may be subject to a periodic charge of up to 6% on the value of the trust above the available NRB at that time. The actual rate is usually lower after deductions and reliefs.
This 10-year charge applies regardless of whether income has been paid out or not — it’s based on the value of the trust at that date.
3. Exit Charges
Whenever assets leave the trust (e.g., when distributed to a beneficiary), an exit charge may apply — typically a proportion of the 6% rate based on how long it’s been since the last periodic charge or since the trust began.
4. Ongoing Income and Capital Gains Tax
Trusts can suffer high rates of both:
- Income Tax: Trustees pay 45% on most income (dividends taxed at 39.35%), unless the income is mandated to beneficiaries
- Capital Gains Tax (CGT): Trusts have a smaller CGT exemption (£1,500 in 2025/26) and pay 20% (or 28% for residential property) on gains
This makes it crucial to think carefully about what investments are held within a trust (more on this later).
Understanding the Rysaffe Rule (and Why It Still Matters)
The Rysaffe principle (named after a 1980s tax case) made it possible to create multiple trusts on different days, each with its own NRB.
The Old Strategy
Until 2006, this was a powerful way to spread IHT planning — multiple trusts, multiple allowances.
What Changed?
From 22 March 2006, all new relevant property trusts created by the same settlor are grouped together for IHT purposes if money is settled into them on the same day.
This effectively stopped the “multiple nil rate bands in one day” strategy — but crucially, it didn’t stop the strategy altogether.
How to Use It Now
If you stagger the creation of trusts and more importantly the settlement of funds into these trusts across different tax years or even just different days, the Rysaffe principle still applies. Each trust gets:
- Its own entry allowance up to the nil rate band
- Separate periodic and exit charge calculations
So if you’re planning to place significant wealth into trust, you could:
- Create one trust this year
- Create another the following year (or the next day, depending on your strategy)
- Use your NRB again, if seven years has passed since the first gift, assuming no other gifts or CLTs
This is particularly powerful for clients in their 50s and 60s who want to begin gradual wealth transfer without facing big IHT charges upfront.
Making Trusts Work Over the Long Term
Even the best-structured trust will fall apart if it’s mismanaged. The key to making trusts work for you long-term is not just tax efficiency — it’s governance and investment strategy.
1. Get the Right Trustee Structure
Trustees have a legal obligation to act in the best interests of all beneficiaries. A strong trustee setup means:
- Everyone understands their roles and responsibilities
- Decisions are well documented and regularly reviewed
- Trustees know how to interact with professional advisers (legal, tax, investment)
Tip: Get family members involved early. Even if your children are not yet ready to be trustees, involve them in discussions. Consider appointing them as trustees when appropriate — it builds continuity and understanding.
Having at least one professional trustee or an adviser experienced in trust administration can also help keep the trust compliant and forward-looking.
2. Choose Tax-Efficient Investments
As we’ve seen, trusts are taxed harshly on income and gains. The wrong investment approach can erode the value of the trust over time.
Suitable Options Might Include:
- Growth-focused assets with low income yield (e.g. accumulation funds, growth stocks)
- Investment bonds, especially offshore, as they allow trustees to defer tax until encashment — and even then, tax may be borne by the beneficiary if assigned
- Tax-efficient funds or trusts that roll up returns rather than pay out income
Avoid placing high-dividend funds or rental property into a discretionary trust unless there’s a clear rationale — the tax leakage can be significant.
Also ensure trust investments align with the letter of wishes and the needs of future generations. Long-term planning needs long-term thinking.
Trusts Are Still a Vital Estate Planning Tool
Despite tax tightening and regulatory burdens, trusts still offer:
- Long-term control
- Protection from financial threats
- Potential for IHT mitigation when planned carefully
The key is to act early, plan strategically, and manage proactively. Trusts are not a ‘set-and-forget’ solution. They require ongoing input and review.
If you want to make sure your trust does what it’s meant to — protect your family and reduce tax — it’s worth taking specialist advice.
If you would like help understanding how Trusts could help protect your family wealth then why not take advantage of our free 15 minute call. You can speak to a Chartered Financial Planner who will listen to your situation, give you an outline of what you need to consider and guide you in the right direction.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
