Discretionary, Bare & Life Interest Trusts: A Complete Comparison
The three most commonly used trust structures in England and Wales — each with distinct legal characteristics, tax treatment, and appropriate use cases. This guide sets out the key differences so you can make an informed decision about which structure is right for your circumstances.
Trusts are one of the most versatile tools in estate planning — but the term “trust” covers a wide range of legal structures with very different characteristics. Choosing the wrong type of trust can result in unexpected tax liabilities, inflexibility at a critical moment, or a structure that simply does not achieve what you intended.
This guide focuses on the three trust structures most commonly encountered in private client work: the discretionary trust, the bare trust, and the life interest trust. Each has its own legal framework, tax treatment, and appropriate use cases. Understanding the differences is the first step to making the right choice for your estate.
Discretionary Trust
Maximum flexibility — trustees decide who benefits and when
A discretionary trust gives the trustees complete discretion over how, when, and to whom the trust assets are distributed. No beneficiary has a fixed entitlement. The trustees hold the assets and exercise their judgment — guided by a letter of wishes from the settlor — to distribute income and capital as circumstances change.
When to Use a Discretionary Trust
- ▸Protecting assets for beneficiaries who are young, vulnerable, or financially inexperienced
- ▸Blended families where you want to balance competing interests fairly
- ▸Business owners who need flexibility around succession and tax planning
- ▸Where beneficiaries' circumstances may change significantly over time
- ▸Inheritance tax planning — assets in a discretionary trust are outside the settlor's estate after seven years
- ▸Protecting a beneficiary's means-tested benefits (e.g., disability benefits)
Tax Treatment
Trust income is taxed at the trust rate — 45% on income, 39.35% on dividends. Beneficiaries who receive distributions can reclaim tax if they are lower-rate taxpayers.
Trustees pay CGT at 20% (or 28% on residential property). The trust has an annual CGT exemption of half the individual allowance.
Subject to the relevant property regime: a 20% entry charge on assets above the nil-rate band, a 6% periodic charge every ten years, and an exit charge when assets leave the trust.
SDLT applies when property is transferred into or out of the trust in the usual way.
Advantages
- ✓Highly flexible — trustees can respond to changing family circumstances
- ✓Protects vulnerable or young beneficiaries from themselves
- ✓Useful for IHT planning when structured correctly
- ✓Can protect assets from a beneficiary's creditors or divorce proceedings
- ✓Allows the settlor to guide distribution via a letter of wishes without binding trustees
Disadvantages
- ✗Complex to administer — trustees have significant ongoing responsibilities
- ✗Subject to the ten-year periodic charge (6% of trust value above nil-rate band)
- ✗Higher trust income tax rates apply (45%)
- ✗No beneficiary has a guaranteed right to income or capital
- ✗Professional trustee fees can be substantial
Bare Trust
Simple and transparent — the beneficiary owns the assets outright
A bare trust (also called an absolute trust) is the simplest form of trust. The beneficiary has an immediate, absolute, and indefeasible right to both the income and capital of the trust. The trustee holds the legal title but has no discretion — they must hand over the assets to the beneficiary on demand once the beneficiary reaches 18 (or 16 in Scotland).
When to Use a Bare Trust
- ▸Holding assets for children until they reach adulthood
- ▸Junior ISAs and children's savings held by parents or grandparents
- ▸Personal injury trusts — protecting compensation awards without affecting means-tested benefits
- ▸Simple, straightforward gifts where the beneficiary is known and fixed
- ▸Tax-efficient gifts to grandchildren (the gift is a PET for IHT purposes)
- ▸Where simplicity and low administration costs are priorities
Tax Treatment
Income is treated as the beneficiary's own income and taxed at their marginal rate. If the beneficiary is a minor child of the settlor, the income is taxed as the settlor's income (the parental settlement rules).
Gains are treated as the beneficiary's gains and taxed at their CGT rate. The beneficiary uses their own annual CGT exemption.
Assets in a bare trust are treated as the beneficiary's own assets for IHT purposes. The gift into the trust is a Potentially Exempt Transfer (PET) — no IHT if the settlor survives seven years.
SDLT applies on property transfers in the usual way.
Advantages
- ✓Simple and inexpensive to set up and administer
- ✓Beneficiary's income tax rates apply — often lower than trust rates
- ✓No periodic or exit charges for IHT purposes
- ✓The gift is a PET — potentially fully exempt from IHT after seven years
- ✓Ideal for personal injury trusts to protect means-tested benefits
Disadvantages
- ✗No flexibility — the beneficiary's entitlement is fixed and cannot be changed
- ✗Beneficiary can demand the assets at 18 — regardless of maturity
- ✗Parental settlement rules can create an unexpected income tax charge for parents
- ✗Not suitable where you want to protect assets from a beneficiary's poor decisions
- ✗Cannot be used to balance competing interests in a blended family
Life Interest Trust
Income for life, capital preserved for the next generation
A life interest trust (also called an interest in possession trust) gives one person — the life tenant — the right to receive income from the trust assets (or to occupy a property) for their lifetime. On the life tenant's death, the capital passes to the remainder beneficiaries. This structure is commonly used in wills to protect a surviving spouse while preserving the estate for children.
When to Use a Life Interest Trust
- ▸Protecting a surviving spouse's right to live in the family home while preserving the children's inheritance
- ▸Blended families — ensuring a second spouse is provided for without disinheriting children from a first marriage
- ▸Providing income for a surviving spouse while ring-fencing capital for children
- ▸Care fee planning — protecting a share of the property from local authority assessment
- ▸Where you want to ensure assets ultimately pass to specific beneficiaries (e.g., your own children)
- ▸Inheritance tax planning using the nil-rate band trust structure
Tax Treatment
The life tenant is treated as owning the income and is taxed at their own marginal rate. The trust itself pays income tax at the basic rate, which the life tenant can reclaim if they are a non-taxpayer.
The life tenant is treated as owning the trust assets for CGT purposes and can use their own annual CGT exemption. On the life tenant's death, there is a CGT-free uplift to market value.
The trust assets are treated as part of the life tenant's estate for IHT purposes. On the life tenant's death, the assets are subject to IHT in their estate — but the spousal exemption applies if the life tenant is the surviving spouse.
SDLT applies on property transfers. The life tenant's occupation of a property held in trust does not itself trigger SDLT.
Advantages
- ✓Protects a surviving spouse's right to income and occupation
- ✓Preserves capital for children or other remainder beneficiaries
- ✓Relatively straightforward to administer compared to discretionary trusts
- ✓No periodic or exit IHT charges (unlike discretionary trusts)
- ✓CGT-free uplift on the life tenant's death
- ✓Useful for blended families and second marriages
Disadvantages
- ✗Less flexible than a discretionary trust — the life tenant's entitlement is fixed
- ✗Trust assets form part of the life tenant's estate for IHT — no IHT saving on the life tenant's death
- ✗Potential for conflict between the life tenant and remainder beneficiaries
- ✗The life tenant cannot access capital without the trustees' consent
- ✗Trustees must balance the interests of the life tenant and remainder beneficiaries
Side-by-Side Comparison
A quick-reference table contrasting the three trust types across key features.
| Feature | Discretionary | Bare | Life Interest |
|---|---|---|---|
| Beneficiary has fixed entitlement | ✗ | ✓ | Partial |
| Trustees have discretion | ✓ | ✗ | ✗ |
| IHT periodic charge (10-year) | ✓ | ✗ | ✗ |
| IHT exit charge | ✓ | ✗ | ✗ |
| Assets in settlor's estate (IHT) | ✗ | ✗ | Life tenant's estate |
| Income taxed at trust rate (45%) | ✓ | ✗ | ✗ |
| Beneficiary uses own CGT allowance | ✗ | ✓ | ✓ |
| CGT-free uplift on death | ✗ | ✗ | ✓ |
| Suitable for vulnerable beneficiaries | ✓ | Limited | ✗ |
| Suitable for personal injury trusts | Sometimes | ✓ | ✗ |
| Suitable for blended families | ✓ | ✗ | ✓ |
| Suitable for care fee planning | Sometimes | ✗ | ✓ |
| Administration complexity | High | Low | Medium |
Which Trust Is Right for You?
A practical guide to matching your circumstances to the appropriate trust structure.
“You want to protect assets for children or grandchildren without giving them immediate control”
Trustees can manage and distribute assets as the beneficiaries mature, protecting against poor financial decisions.
“You want to make a simple, tax-efficient gift to a child or grandchild”
The gift is a PET for IHT, income is taxed at the beneficiary's rate, and administration is minimal.
“You want to protect your surviving spouse while preserving your estate for your children”
The surviving spouse receives income (or the right to occupy the property) for life; the capital passes to your children on their death.
“You have received a personal injury compensation award and receive means-tested benefits”
A personal injury trust protects the compensation from being treated as capital for means-tested benefit purposes.
“You have a blended family and want to balance the interests of a second spouse and children from a first marriage”
A life interest trust gives the second spouse income for life; a discretionary trust gives trustees flexibility to respond to changing needs.
“You want to protect your share of the family home from care fees after your death”
Your share passes into trust on your death, giving your spouse the right to remain in the property while protecting your share from assessment.
Supplementary Reference: Pros and Cons of Trusts
A general overview of the advantages and disadvantages of using trusts in estate planning
The following section summarises the general pros and cons of trusts as a planning tool — applicable across all trust types. This provides useful context for the more detailed comparison above.
Advantages of Trusts
- ✓Asset Protection: Trusts can protect assets from a beneficiary's creditors, divorce proceedings, or poor financial decisions — depending on the trust type.
- ✓Control Over Distribution: You can specify when and how assets are distributed, rather than leaving a lump sum to a beneficiary who may not be ready to manage it.
- ✓Inheritance Tax Planning: Certain trust structures can reduce the IHT payable on your estate, particularly when combined with lifetime gifting strategies.
- ✓Avoiding Probate Delays: Assets held in trust do not form part of your estate for probate purposes and can be distributed without waiting for a grant of probate.
- ✓Protecting Means-Tested Benefits: A personal injury trust or discretionary trust can protect a beneficiary's entitlement to means-tested benefits such as Universal Credit.
- ✓Providing for Vulnerable Beneficiaries: Trusts allow you to provide for a beneficiary with a disability or mental health condition without disqualifying them from state support.
- ✓Blended Family Planning: Trusts allow you to balance the competing interests of a surviving spouse and children from a previous relationship.
- ✓Continuity of Management: Trustees can manage assets continuously across generations without the disruption of probate or administration.
Disadvantages of Trusts
- ✗Complexity and Cost: Trusts — particularly discretionary trusts — require careful drafting, ongoing administration, and annual tax returns. Professional trustee fees can be substantial.
- ✗Loss of Direct Control: Once assets are placed in trust, the settlor loses direct ownership. Trustees have legal title and must act in the interests of the beneficiaries.
- ✗Tax Charges on Discretionary Trusts: Discretionary trusts are subject to the relevant property regime: a 20% entry charge, a 6% ten-year periodic charge, and exit charges.
- ✗Higher Income Tax Rates: Discretionary trusts pay income tax at 45% (or 39.35% on dividends) — significantly higher than individual rates.
- ✗Potential for Disputes: Trusts can create conflict between trustees and beneficiaries, or between different classes of beneficiary (e.g., life tenant and remainder beneficiaries).
- ✗Deliberate Deprivation Rules: Trusts created primarily to avoid care fees can be set aside by local authorities under deliberate deprivation rules.
- ✗Irrevocability: Many trusts are irrevocable once established. Changing the terms or unwinding the trust can be complex and may trigger tax charges.
- ✗Trustee Obligations: Trustees have significant legal duties and can be personally liable if they breach their obligations. Lay trustees may find the responsibilities onerous.
Frequently Asked Questions
What is the difference between a discretionary trust and a bare trust?
In a bare trust, the beneficiary has an absolute, fixed right to the assets — the trustee simply holds legal title. In a discretionary trust, no beneficiary has a fixed entitlement. The trustees decide who benefits, when, and how much. Bare trusts are simpler and cheaper to run; discretionary trusts offer far greater flexibility but come with higher tax rates and ongoing administrative obligations.
Is a life interest trust the same as a property protection trust?
A property protection trust is a type of life interest trust used in wills. It places your share of the family home into trust on your death, giving your surviving spouse the right to live there for life, while preserving your share for your children. The terms are often used interchangeably in the context of wills, though a life interest trust can hold any assets — not just property.
Which trust is best for inheritance tax planning?
It depends on your objectives. Discretionary trusts can be effective for IHT planning — assets leave your estate after seven years — but they are subject to the relevant property regime (periodic and exit charges). Life interest trusts do not attract periodic charges but the assets remain in the life tenant's estate. Bare trusts are the simplest for IHT: the gift is a PET and fully exempt after seven years, with no ongoing charges.
Can I change a discretionary trust into a life interest trust?
In principle, trustees of a discretionary trust can exercise their powers to appoint assets to a beneficiary on life interest terms — effectively converting the trust. However, this requires careful legal and tax advice, as it may trigger IHT exit charges and CGT. You should always take specialist advice before varying the terms of an existing trust.
What is a letter of wishes and does it bind the trustees?
A letter of wishes is a non-binding document in which the settlor sets out their wishes for how the trustees should exercise their discretion. It is most commonly used with discretionary trusts. While it does not legally bind the trustees, they are expected to take it into account. It allows the settlor to guide the trustees without removing their flexibility to respond to changing circumstances.
Are trusts only for wealthy families?
No. Trusts are used across a wide range of circumstances — from simple bare trusts holding a child's savings to life interest trusts in wills protecting a surviving spouse. Personal injury trusts are essential for anyone receiving a compensation award who also receives means-tested benefits. The right trust structure depends on your objectives, not the size of your estate.
What is the ten-year periodic charge on a discretionary trust?
Every ten years, a discretionary trust is subject to a periodic charge of up to 6% of the trust's value above the nil-rate band (currently £325,000). For example, a trust worth £500,000 would face a charge on £175,000 — up to £10,500. There is also an exit charge when assets leave the trust between ten-year anniversaries. These charges do not apply to bare trusts or life interest trusts.
Can a trust protect assets from care home fees?
A life interest trust in a will can protect your share of the family home from being assessed for care fees after your death — because your share passes into trust rather than outright to your surviving spouse. However, trusts created during your lifetime to avoid care fees are subject to deliberate deprivation rules. Local authorities can set aside such arrangements if they conclude the primary purpose was to avoid care costs.
What happens to a bare trust when the beneficiary turns 18?
Once the beneficiary reaches 18 (or 16 in Scotland), they can demand that the trustees hand over the trust assets. The trustees have no discretion to refuse. This is one of the key limitations of a bare trust — if you are concerned about a young beneficiary's financial maturity, a discretionary trust may be more appropriate.
Do I need a solicitor to set up a trust?
While there is no legal requirement to use a solicitor, trusts involve complex legal and tax considerations. An incorrectly drafted trust can have unintended tax consequences, fail to achieve your objectives, or create disputes between beneficiaries. We strongly recommend taking specialist legal advice before setting up any trust structure.
Speak to a Trust Solicitor
Choosing the right trust structure is one of the most important decisions in estate planning. Our specialist team — including STEP-qualified advisers — can help you understand which structure is appropriate for your circumstances and draft the trust deed to achieve your objectives.
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