How a trust works in the UK, without the pen trick

A trust is a legal arrangement in which trustees hold an asset for beneficiaries, under rules set by the person who created it (the settlor). It changes who holds the legal title; it does not make the asset disappear for tax or care fees.

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The sixty-second version uses a pen as the house. You hold the pen: you own the home. Divorce, debts, care fees and tax can reach it. You drop the pen into a mug labelled “trust,” and say you do not own a home any more.

The mug is doing too much work. Here is the same idea with the labels a solicitor would use, and a family you could live next door to.

Who are the settlor, trustees and beneficiaries?#

A trust needs a settlor, trustees and beneficiaries.

The settlor sets it up and puts an asset in. The trustees hold the legal title and must follow the trust deed. The beneficiaries benefit — they might live in the house, receive income, or inherit the capital at the end.

In a family trust the same person is often two of these, sometimes all three. That overlap is allowed. It is also why “I don’t own it” is a shaky sentence. If you put the house in, you live in it, and you can benefit, the law often still treats you as the person who has the house.

The pen, rewritten#

Mark and Sue own a semi in Sheffield worth £260,000 as joint tenants. The “modern threats” in their case are specific.

Sue has an adult son from an earlier relationship. If Mark inherits the house outright and dies without a new will, intestacy may not favour Sue’s son. If Sue inherits outright and later needs care, the whole house can be in her assessment. If either of them is sued personally, a house in their name is an asset of theirs.

They sever the joint tenancy. Each now owns half. Each will leaves that half to trustees, on terms that the survivor can live there for life, and that the capital then goes to Sue’s son and Mark’s daughter in the shares they agree. The trustees are the survivor and a sister who is good with paperwork.

When Mark dies, his half does not become Sue’s to remortgage or leave to a new husband. She stays. His half is not normally included in her care means test. Inheritance tax between spouses is usually nil; the reservation-of-benefit problem does not arise, because Mark is not retaining a benefit in his own lifetime gift. He has left his share on death, to a trust.

That is a trust working. Nobody pretended the pen had vanished.

What does a trust not protect against?#

It does not say “what home?” if a creditor, HMRC or a council asks the right question.

• A lifetime transfer you still benefit from can remain in your inheritance tax estate.
• A transfer whose main aim is avoiding care fees can be ignored in the means test.
• Trustees who ignore the deed, or who treat the assets as a private account, can be personally liable.
• A trust does not avoid income tax or capital gains tax by magic. Trustees have their own tax rules, and a tax return is common.

It also does not replace a will. Anything not transferred still needs one. Guardians for children can only be appointed by will.

Lifetime trust or will trust: which is right?#

A will trust costs less and starts when it is needed, on death. It is the right default for a couple protecting a share of the home.

A lifetime trust moves the house now. It can suit a widow or widower who wants the home managed for children and is willing to accept the tax and care analysis in writing. It is a bad fit for someone who wants to keep every benefit and lose every risk. Land Registry will need a transfer. The mortgage lender must consent if there is a mortgage. You will pay a solicitor. Budget properly rather than comparing the fee with a single week of care and calling it free money.

Trusts in England and Wales can last up to 125 years. That is the perpetuity period, not a promise that the paperwork looks after itself. Trustees should be people who will still answer the phone in ten years, or a professional who is paid to.

Questions worth asking before anyone sets one up#

• What event are we protecting against: remarriage, care fees, a spendthrift child, probate delay?
• Who can live in the house, and can the trustees sell and buy another?
• Who is not allowed to benefit, and why?
• What happens if a trustee dies?
• What tax return is due, and who files it?

If the adviser cannot answer those without returning to the pen, get a second meeting.

More detail: types of trust, discretionary trusts, what is a trust?.

Frequently asked questions

How does a trust work in simple terms?

One person (the settlor) gives an asset to people they choose (the trustees), who legally own it and must look after it for someone else (the beneficiaries) under the rules in the trust deed or will.

Who owns a house that is in a trust?

The trustees hold the legal title, and it is registered in their names at HM Land Registry. They must use the house only as the trust allows — for example, letting a surviving partner live there for life.

What is the difference between a lifetime trust and a will trust?

A will trust is written into your will and starts on death; nothing is transferred now. A lifetime trust moves the asset to trustees while you are alive, which needs a Land Registry transfer, your lender’s consent if there is a mortgage, and tax advice.

How long can a trust last in England and Wales?

Up to 125 years. That is the perpetuity period set by the Perpetuities and Accumulations Act 2009 for trusts created on or after 6 April 2010.

This is general information, not legal advice. Everyone's situation is different — speak to a qualified adviser before acting. KeepTheLot is an independent information service covering England & Wales. We are not a law firm.

Part of our guide to trusts.