Is a trust only for the “super rich”? You might think so, but they’re increasingly valuable tools for families across the income spectrum who want to protect their assets, plan for the future and provide for loved ones efficiently.
Whether you’re concerned about inheritance tax, want to safeguard your children’s financial future or need to protect vulnerable beneficiaries, holding investments in trust can offer practical solutions that align with your values and objectives.
Trusts are notoriously complex and require expert advice to navigate confidently. In this guide, we shed light on how a trust could help hold your investments, outlining four key benefits to help you determine whether this strategy suits your circumstances.
At its core, a trust is a legal arrangement in which assets (including investments such as stocks, bonds, funds or portfolios) are transferred to trustees.
The trustees then manage these for the benefit of named beneficiaries (within specific rules about how they should be managed and distributed). Here’s a snapshot of how it all works:
In the UK, several trust types exist, each with distinct tax treatments and purposes. The most common for holding investments are discretionary trusts, which give trustees flexibility to respond to changing family circumstances over time.
Current UK rules allow individuals to transfer up to £325,000 into most trusts without immediate inheritance tax charges, though this can be higher when combining spousal allowances or using the residence nil-rate band strategically.
Please note, transfers into a discretionary trust are Chargeable Lifetime Transfers (CLTs) and will only escape an immediate IHT charge if the total of CLTs made in the previous 7 years falls within the settlor’s nil‑rate band (usually £325,000). If the transfer exceeds the band, a 20% entry charge applies immediately.
Regular gifts from income can also fund trusts without eating into allowances, provided certain conditions are met.
Trusts operate within specific tax regimes. Income generated within discretionary trusts faces a 45% rate (39.35% for dividends), though distributions to beneficiaries carry tax credits.
Capital gains are taxed at 24% after the trust’s annual exemption of £1,500. These rates make professional advice essential to structure trusts tax-efficiently.
If transfers into trusts use the available nil‑rate band and you live for 7 more years, those assets and future growth may no longer form part of your estate for IHT.
For instance, transferring a £200,000 investment portfolio into a trust that grows to £600,000 over 15 years removes the entire £600,000 from your taxable estate (a potential IHT saving of £240,000).
Even if you don’t survive the full seven years, taper relief reduces the IHT charge progressively after three years. Meanwhile, you can continue making regular gifts from surplus income to fund the trust without any time limit or total cap, provided you maintain your normal standard of living.
This creates powerful opportunities for gradually moving wealth outside your estate whilst investments grow in a protected environment.
Rather than leaving investments directly to a young adult or someone with complex needs, trustees can manage assets professionally whilst ensuring the beneficiary receives appropriate support.
Consider parents concerned about leaving a substantial investment portfolio to a 21-year-old son who lacks financial maturity.
A discretionary trust would let the trustees release funds gradually for education, housing deposits or living costs, whilst protecting the capital from poor decisions. The son benefits from the investments without the risks of outright ownership.
For beneficiaries with disabilities, vulnerable person trusts offer enhanced protections with favourable tax treatment, ensuring care and quality of life without jeopardising means-tested benefits.
Investments held in discretionary trusts don’t form part of a beneficiary’s personal estate, meaning they’re generally protected in divorce settlements, bankruptcy proceedings or professional negligence claims.
Imagine a surgeon facing a potential lawsuit. She may take comfort knowing their children’s trust funds remain secure regardless of the litigation outcomes.
Similarly, if an adult beneficiary enters a financially unstable marriage, investments in trust remain outside the matrimonial pot should the relationship fail.
This isn’t about cynicism. It’s prudent recognition that protecting family wealth across generations sometimes requires safeguards against unpredictable circumstances. With UK divorce rates affecting roughly 42% of marriages, such protection carries obvious value.
Professional trustees or advised family trustees typically employ diversified investment strategies aligned with the trust’s timeframe and objectives.
This contrasts sharply with directly held investments that pass through estates, which can freeze assets for months during administration, miss market opportunities or force sales at inopportune times. The trust vehicle simply continues operating through transitions.
Regular reviews by professional advisers keep trust investments aligned with current economic conditions, tax rules, and family needs. With markets constantly evolving, active oversight protects and grows trust assets more effectively than “set and forget” approaches.
If you’d like to ensure you’re taking the right steps to protect and grow your wealth, safeguarding your financial future and progressing towards your goals, please get in touch.
Your capital is at risk. Investments can go down as well as up, and you may not get back the amount you originally invested. Past performance is not indicative of future results. Diversification does not guarantee profits or fully protect against losses. Tax treatment depends on individual circumstances and may change in the future. This content is for information only and does not constitute personal financial advice. Readers should seek independent financial advice before making any investment decisions.
Castlegate Financial Management Limited is registered in England No. 2077374. Registered Office: 8 Castlegate, Grantham, Lincolnshire. NG31 6SE. Authorised and Regulated by the Financial Conduct Authority. FCA No. 169777.
