What Is a Trust Fund? A Complete Guide for UK Families
When planning your family’s future, you may ask, what is a trust fund? It’s a question we hear all the time—and the answer could be life-changing for how you protect and pass on your wealth.
In simple terms, a trust fund is a legal arrangement that allows you to pass assets—like money, property, or investments—to someone else, while controlling how and when those assets are used. In the UK, trust funds are often used to protect children’s inheritances, reduce inheritance tax, or manage wealth responsibly across generations.
In this easy-to-read guide, we’ll explain exactly what a trust fund is, how it works in the UK, and how you can use one to secure your loved ones’ future. If you’re serious about planning ahead, book a free consultation with our estate planning specialists.
What Is a Trust Fund and How Does It Work?
A trust fund is a legal structure that involves three key roles:
- The Settlor: The person who sets up the trust and puts assets into it.
- The Trustee(s): The person or people responsible for managing the trust according to legal rules.
- The Beneficiary(ies): The person or people who benefit from the trust fund (e.g. your children or grandchildren).
When you set up a trust fund, you hand over control of specific assets to your trustee(s), who must manage them for the benefit of your chosen beneficiaries. This setup allows you to maintain control over how your money or property is used—even after you’re gone.
Types of Trust Funds in the UK
There are several types of trust funds in the UK, each with different rules and tax treatment. The most common ones include:
1. Bare Trusts
A Bare Trust gives a beneficiary full rights to the assets when they reach age 18 (or 16 in Scotland). These are often used for children and are simple to manage, but offer little long-term control.
2. Discretionary Trusts
With a Discretionary Trust, trustees have the power to decide how and when to distribute assets. This is ideal for families wanting flexibility or to protect beneficiaries with complex needs or money management issues.
3. Interest in Possession Trusts
These allow a beneficiary to receive income from the trust (like rent or dividends), while the capital is preserved for others in the future. It’s often used when passing wealth to a spouse first, then children later.
4. Child Trust Funds (CTFs)
A Child Trust Fund is a specific savings scheme introduced by the UK government for children born between 2002 and 2011. These accounts are now matured but still relevant for families with older teenagers accessing their funds.
Why Set Up a Trust Fund?
Trusts are not just for the super-wealthy. More and more UK families are using them to:
- Protect a child’s inheritance until they’re ready to manage it
- Reduce inheritance tax liabilities
- Provide for vulnerable relatives without affecting their benefits
- Control how wealth is used even after your death
- Shield assets from divorce or creditors in complex family situations
So, when asking what is a trust fund, think of it as a flexible, legally secure way to manage the future of your wealth—your way.
Are Trust Funds Tax Efficient?
Trusts come with tax rules you must understand. In many cases, trusts can help you manage or reduce inheritance tax (IHT), especially if assets are placed in trust seven years before death. However, some trusts—like Discretionary Trusts—are subject to ongoing IHT charges every 10 years and when assets are distributed.
This is why it’s so important to speak with a professional. Setting up the wrong type of trust, or doing it without advice, can trigger unexpected tax bills. Book a consultation with us to find the most efficient option for your family’s circumstances.
Who Should Consider a Trust Fund?
Trusts are ideal for a wide range of people, including:
- Parents who want to leave assets to young or vulnerable children
- Couples in second marriages wanting to protect their children’s inheritance
- Homeowners who want to protect property from care home fees
- Grandparents wanting to pass on wealth with control and tax efficiency
- Anyone concerned about future family disputes or financial risks
If you relate to any of these, it’s time to start asking not just what is a trust fund, but which type of trust fund is right for me?
How to Set Up a Trust Fund in the UK
Setting up a trust fund involves legal documents, tax considerations, and choosing the right trustees. Here’s a quick overview of the process:
- Choose the type of trust that suits your needs
- Select your trustees (usually 2 or more trusted individuals)
- Draft the trust deed with the help of a legal professional
- Transfer the chosen assets into the trust
- Register the trust with HMRC if necessary
DIY trusts can lead to costly mistakes. At MP Estate Planning UK, we ensure your trust is compliant, efficient, and tailored to your family’s goals.
Common Questions About Trust Funds
Are trust funds only for the wealthy?
No. Trusts are used by thousands of everyday families in the UK for simple estate planning and asset protection.
Can I set up a trust for my child?
Yes. Trusts are a popular way to hold assets until your child reaches a responsible age. Bare Trusts and Discretionary Trusts are commonly used for this purpose.
What is the difference between a trust fund and a will?
A will only takes effect after death. A trust fund can be set up during your lifetime (a living trust) or through your will. Trusts offer more control over how assets are used.
Can a trust protect my home from care fees?
Possibly. Many families use Property Protection Trusts to ring-fence a share of their home from future care home fee assessments. Proper planning is key.
When Is the Best Time to Set Up a Trust Fund?
There’s no “perfect age” to create a trust. But the earlier you act, the more options you’ll have for protecting your assets and reducing your tax liabilities.
Trusts set up as part of long-term planning—rather than last-minute decisions—are far more likely to hold up under scrutiny and provide peace of mind.
Start Planning with Professional Support
Trusts can be powerful tools—but only when used correctly. If you’re still wondering what is a trust fund and how it could help your family, the best next step is to speak with an expert.
- Book a free consultation with our estate planning team today
- Or explore our affordable trust planning packages
We’ll guide you through your options and help you set up a trust fund that protects what matters most—on your terms.