Trusts are not a Magic Bullet

A family came to see me recently. The mother had been worrying. She'd worked hard her whole life, her husband too, and what mattered to her now was simple: she wanted to make sure her children got what she and her husband had built, not the taxman.

One of the daughters had been doing some research — watching videos online, reading articles, asking around — and trusts kept coming up as the answer. The family had actually spoken to a solicitor a few years earlier, and the solicitor hadn't recommended one. That made the daughter suspicious. "Everyone online is saying this is what we should do. Why didn't our solicitor set one up? Did they get it wrong?"

The solicitor didn't get it wrong. In fact, that solicitor was one of the few people in this story who got it right.

The social media version vs. reality

Here's what the social media version of trusts looks like: you put your house in a trust, it disappears from your estate, your children inherit without paying 40% to the taxman, and everyone lives happily ever after.

It sounds brilliant. It sounds too good to be true. That's because it is.

Let me walk you through what would actually have happened if this family had put their property into a trust.

Let's say the house is worth £1 million. To transfer that into a discretionary trust, you first need to account for the nil rate band — currently £325,000. Everything above that gets hit with a 20% lifetime charge.

So: £1 million minus £325,000 leaves £675,000. Twenty percent of that is £135,000.

Not when you die. Not in seven years. Now. Before anyone's even benefited from the trust. That's £135,000 just to set it up.

And it doesn't stop there.

You can't just carry on living there

This is the part that catches everyone. The family home goes into the trust, and the parents think life carries on as normal. Same house, same routine, just with a different name on the paperwork.

But HMRC thought of that decades ago. If you give something away and keep using it — like living in a house you've transferred into a trust — it's called a gift with reservation of benefit. And it means the property stays in your estate for inheritance tax purposes anyway.

So you've paid £135,000 to transfer it, and it hasn't actually left your estate.

There is a way around this: you pay a full market rent to the trust. For a £1 million property, that could easily be £2,500 to £3,500 a month. For a retired couple living on pensions.

When I explained this, there was a long silence. "So we'd be paying rent on our own home?"

Yes. To a trust that you set up. With money you can't really afford to lose.

Then come the ongoing costs

Every ten years, the trust faces what's called a periodic charge — up to 6% on the value above the nil rate band. So in ten years, if the property's grown in value, there's another bill.

And if assets need to come out of the trust — say the parents need the money for care — there's an exit charge too.

Then there's the annual administration. Trust tax returns. Registration with HMRC's Trust Registration Service. Trustee meetings. Professional fees. Year after year after year.

I've met families who set up trusts and never filed a single tax return because nobody told them they needed to.

Getting out is harder than getting in

Someone once described trusts to me as lobster pots — easy to get into, very difficult to get out of.

If this family had set up the trust and then realised it wasn't working, unwinding it isn't straightforward. I mentioned to them that a family I'd come across had taken theirs to the High Court to dissolve it. The legal fees? As you can imagine, it was eye watering.

The daughter's face said everything. "So we'd have spent more trying to save inheritance tax than we'd have actually paid in inheritance tax?"

Quite possibly, yes.

So what was the inheritance tax bill without a trust?

Let's do the maths, because this is the bit that usually surprises people.

The parents had a combined estate of around £1.2 million — the house plus some savings. Between the two of them, they had a £1 million inheritance tax allowance (two nil rate bands at £325,000 each, plus two residence nil rate bands at £175,000 each, because the property was passing to direct descendants).

So the taxable amount was around £200,000. At 40%, that's roughly £80,000 in inheritance tax.

Now compare that to the trust route: £135,000 upfront just to set it up, ongoing charges every ten years, annual administration costs, the requirement to pay market rent, and the very real possibility that it wouldn't even achieve what they wanted.

The inheritance tax bill without doing anything complicated? £80,000. Payable from the estate's assets, with six months to arrange it. The trust would have cost them more than the tax.

Sometimes the simplest answer is the right one.

The solicitor knew what he was doing

That solicitor who didn't set up a trust? They looked at the situation and recognised that the family already had a £1 million combined allowance. They knew that putting the property in trust would trigger an immediate tax charge, create ongoing costs, and potentially not even work because of the gift with reservation rules.

They did exactly the right thing. But because social media told the family something different, they spent years thinking the solicitor had made a mistake.

This is what frustrates me about the trust industry. Not the trusts themselves — they have their place. What frustrates me is the marketing. The videos that make it sound like there's a secret that is only available to the ultra-rich. The implication is that professionals who advise against trusts are somehow less competent than a company selling a product online.

When trusts actually make sense

None of this means trusts are useless. Far from it. But they're a specific tool for specific problems.

I work with trusts regularly for families where a beneficiary can't manage money themselves — perhaps an adult child with a disability, or someone in a volatile personal situation. A discretionary trust lets the trustees control how and when money is distributed, rather than handing a lump sum to someone who might not be able to protect it.

Trusts also work well when you want to control the timing of an inheritance. Maybe your children are too young, or you're in a second marriage and want to make sure your spouse is looked after whilst ensuring assets eventually pass to your children from your first marriage.

For business owners, trusts can hold company shares and provide continuity when someone dies. And there are situations where trusts genuinely do reduce inheritance tax — but only when they're properly structured, with full understanding of the costs, and with professional advice from someone who isn't just trying to sell you a product.

The spectrum nobody talks about

One of the things that gets lost in the social media noise is that "trust" isn't one thing. It's a whole family of legal structures, and they behave very differently from each other.

Some trusts let you keep access to your money. A loan trust, for example, lets you lend capital to the trust and call it back whenever you need it. The growth sits outside your estate, but your original money is still available. A discounted gift trust gives you a fixed income stream, but the capital is gone for good.

Other trusts are completely irrevocable. Once assets go into a bare trust for your grandchildren, those assets belong to the grandchildren. Full stop. A discretionary trust gives the trustees flexibility, but you as the person who set it up typically can't benefit from it yourself.

And here's the trade-off that nobody on social media mentions: the trusts that give you the biggest inheritance tax benefit are the ones where you give up the most control. HMRC isn't stupid. The more genuinely you've given something away, the more tax relief you get. Want to keep access? Keep the tax liability. Want the tax benefit? Give up control.

The tax trap inside the trust

Even when a trust is the right structure, there's an ongoing cost that most people don't find out about until their first tax bill arrives.

Discretionary trusts pay income tax at 45% on anything over £500 a year. No personal allowance. No basic rate band. No dividend allowance. From the first pound above that £500 threshold, it's the highest rate in the UK tax system.

So if the trust holds investments generating £20,000 a year in income, roughly £8,400 of that goes straight to HMRC. Every year. Before the beneficiary sees a penny.

That's not a tax-efficient structure. That's one of the least tax-efficient structures available. And yet people set them up believing they're saving money.

There are ways to manage this but they require specialist advice and ongoing attention. A trust isn't something you set up and forget about. It's a living, breathing financial commitment.

What I told the family

We parked the trust idea completely. It wasn't right for them, and it would have cost them more than it saved.

Instead, we looked at simpler approaches. We meaningfully reduced the inheritance tax bill with none of the complexity, cost, or risk of a trust.

"So the solicitor was right all along?"

Yes. And so were the simpler options that nobody on social media makes videos about, because they're not exciting enough to go viral.

The question before the structure

If you're thinking about a trust, I'd ask you to pause before you speak to anyone trying to sell you one. Ask yourself one question: what specific problem am I trying to solve?

If the answer is "reduce my tax bill," a trust is almost certainly not your starting point. There are simpler, cheaper, more effective tools to explore first.

If the answer is "protect someone who can't protect themselves," or "make sure my wealth passes to the right people at the right time," then a trust might be exactly the right tool. But even then, the type of trust matters enormously. A bare trust and a discretionary trust are as different as a bicycle and a lorry. They'll both get you somewhere, but they do very different jobs.

Trusts have their place. A well-structured trust, set up for the right reasons, with proper advice, can be genuinely transformative for a family.

But a trust set up because someone saw a video on Instagram? That's not a plan. That's an expensive mistake waiting to happen.

Tax treatment depends on individual circumstances and may change in future. Professional legal and financial advice should always be sought before establishing a trust.

The information in this blog does not constitute as financial advice

The Financial Conduct Authority does not regulate Trusts and Tax Planning