Testamentary Trust UK (2026): Trusts Created by a Will — Types, IHT Treatment, and When to Use One

A testamentary trust is a trust created by a will. It does not exist during the testator's lifetime — it comes into existence at the moment of the testator's death: (1) HOW IT IS CREATED: the testator includes provisions in their will directing that certain assets (or the whole estate) shall be held on trust, with named trustees and beneficiaries, rather than passing outright to a person. The will both creates the trust and determines its terms; (2) WHEN IT ARISES: unlike a lifetime (inter vivos) trust, a testamentary trust cannot operate until after the testator's death. The trust terms in the will become operative on death. The personal representatives (executors) must first administer the estate — collecting assets, paying debts and liabilities — before transferring the relevant assets to the trustees. In many cases, the executors and trustees are the same persons; (3) WHY USE A TESTAMENTARY TRUST: a testamentary trust is used when an outright gift is not appropriate — because the beneficiary: (a) is a minor child who cannot legally own assets outright; (b) lacks capacity (learning disability, mental health condition); (c) is a vulnerable or disabled beneficiary who would lose means-tested benefits if they received a capital sum; (d) is an adult who the testator does not trust to manage a large sum responsibly; (e) the testator wants to provide for a surviving spouse with a life interest while protecting the capital for children; (f) the testator wants to retain flexibility over ultimate distribution; (4) DIFFERENT FROM A LIFETIME TRUST: the key distinction is timing. A lifetime trust is created and funded during the settlor's life — it has a separate legal existence before death. A testamentary trust has NO EXISTENCE before death — the will is simply a document until the testator dies. No gift with reservation, no POAT, and no CLT arises from including testamentary trust provisions in a will.

A discretionary testamentary trust gives the trustees DISCRETION over who among a class of beneficiaries receives income and capital, and when: (1) STRUCTURE: the will identifies a CLASS of potential beneficiaries (e.g. 'my children and grandchildren and their spouses and civil partners') and appoints trustees with full discretion to distribute income and capital to any member of the class in any proportions at any time; (2) IHT ON DEATH — RELEVANT PROPERTY REGIME: assets passing into a discretionary trust under a will form part of the RELEVANT PROPERTY REGIME from the date of death. IHT is charged at 40% on death as if the assets had passed outright (though the normal exemptions and reliefs — NRB, RNRB, spousal exemption, BPR, APR — reduce this). There is no special exemption for a discretionary testamentary trust in the same way as a bereaved minor trust; (3) PERIODIC CHARGE (TEN-YEAR ANNIVERSARY CHARGE): every 10 years, the trust is charged IHT at 6% on the value of trust assets over the NRB. The 6% is calculated on the excess above the available NRB at the date of the charge; (4) EXIT CHARGE: when assets leave the discretionary trust (by appointment to a beneficiary), an exit charge applies. The rate depends on how long the assets have been in the trust since the last ten-year anniversary. The maximum exit charge rate is 6%; (5) INCOME TAX: trustees pay income tax at the trust rate: 45% on non-dividend income; 39.35% on dividends (from 6 April 2024). Standard rate band of £500 per trust (reduced from £1,000 from April 2024). Beneficiaries receive R185 certificates and may reclaim excess tax; (6) TRUST REGISTRATION SERVICE: all UK express trusts (including discretionary testamentary trusts) must be registered with HMRC's Trust Registration Service (TRS) unless specifically exempt. Executors/trustees should register within 90 days of the trust coming into existence; (7) WHEN USED: a discretionary trust is used where maximum flexibility is required — and where the periodic and exit charges are outweighed by the control advantages, asset protection, or protection of means-tested benefits.

A life interest testamentary trust (also called an Interest in Possession trust, or more specifically an Immediate Post-Death Interest — IPDI) gives one beneficiary (the 'life tenant') the RIGHT to receive income from the trust (or to occupy property) for life. On the life tenant's death, the capital passes to the 'remaindermen' (typically the testator's children): (1) STRUCTURE: the will creates a trust. The surviving spouse (or other beneficiary) is the life tenant — they occupy the property and/or receive income. On the life tenant's death, the trust capital passes to named remaindermen (children); (2) IHT ON DEATH — SPOUSAL EXEMPTION: where the life tenant is the surviving spouse, an IPDI under a will qualifies for the SPOUSAL EXEMPTION on the first death under IHTA 1984 s.49A. No IHT on the assets entering the trust on the first death. This is one of the main reasons couples use property trust wills; (3) IHT ON SECOND DEATH: the trust assets are treated as part of the LIFE TENANT'S ESTATE on their death (IHTA 1984 s.49 — the life tenant is treated as owning the trust assets). IHT arises on the combined estate. The RNRB may be available if the trust assets pass to direct descendants; (4) DIFFERENCE FROM DISCRETIONARY TRUST: (a) a life interest trust gives the life tenant a FIXED ENTITLEMENT to income (or occupation) — they cannot be excluded; (b) a discretionary trust gives the trustees DISCRETION — no beneficiary has a fixed right; (c) for IHT, a spousal IPDI gets the s.18/s.49A exemption on first death — a discretionary trust does not; (d) a life interest trust has NO periodic/exit charges during the life tenant's life — it is outside the relevant property regime for IHT (as IPDI); (5) INCOME TAX: income tax is paid by the life tenant at their personal rates (not the trust rate). The IPDI trust income is treated as the life tenant's own income; (6) PRACTICAL USE: the property trust will (severing the joint tenancy; deceased's share into IPDI trust; survivor as life tenant) is the most common use of a testamentary life interest trust.

Bereaved minor trusts and 18-25 trusts are special types of testamentary trust designed to hold assets for minor children who have lost a parent: (1) BEREAVED MINOR TRUST (IHTA 1984 s.71A): a testamentary trust for a minor child where: (a) the child's parent has died; (b) the child will become entitled to the trust assets absolutely when they reach 18; (c) before reaching 18, the child is the sole beneficiary of income and may receive capital at the trustees' discretion: TAX TREATMENT: the bereaved minor trust has highly favourable IHT treatment — it is EXEMPT from all periodic charges and exit charges, regardless of the value of the trust assets. No IHT arises until the child becomes absolutely entitled at 18. It does NOT form part of the relevant property regime; INCOME TAX: the child is treated as the beneficial owner — income is taxable at the child's rates (not the trust rate), subject to the parental settlement rules if assets derive from a parent; (2) 18-25 TRUST (IHTA 1984 s.71D): similar to a bereaved minor trust, but the child becomes entitled to the capital between 18 and 25 rather than at 18: (a) available where a parent has died and the trust is created by the parent's will or by the Criminal Injuries Compensation scheme; (b) NO IHT periodic charges between 18 and 25 (unlike a plain discretionary trust); (c) EXIT CHARGE applies when assets leave the trust after the child's 18th birthday — calculated at a reduced rate based on the number of quarters the asset has been in the trust since the child's 18th birthday. Maximum effective rate: 4.2% (70% of the 6% standard relevant property rate); (3) DISTINCTION FROM TRUST FOR BEREAVED MINOR: the difference is timing of entitlement: (a) bereaved minor trust: MUST become entitled at 18 — no exit charge; (b) 18-25 trust: entitled between 18 and 25 — limited exit charge on the period after 18; (4) WHEN USED: bereaved minor trusts are used in wills of parents with young children — giving the trustees discretion to manage assets for the child's benefit while avoiding the harsher IHT and income tax treatment of a plain discretionary trust.

Vulnerable beneficiary trusts are a special type of discretionary trust for disabled or vulnerable beneficiaries, with special tax treatment: (1) VULNERABLE BENEFICIARY TRUST (IHTA 1984 s.89; TCGA 1992 s.3A; ITA 2007 s.30): a testamentary trust where the primary beneficiary is: (a) a DISABLED PERSON under the MCA 2005 definition — lacks capacity to manage their affairs due to mental impairment; or (b) a person in receipt of certain qualifying benefits (Personal Independence Payment; Disability Living Allowance — care component at higher or middle rate; Attendance Allowance; Universal Credit — limited capability for work and work-related activity); (2) TAX TREATMENT — IHT: the trust is treated as if the beneficiary is entitled to an interest in possession — giving the 'life tenant' treatment under s.89. On the beneficiary's death, the trust assets are treated as part of their estate. Periodic/exit charges apply as if the beneficiary owned the assets — meaning the NRB is potentially available. This is more favourable than a standard discretionary trust; (3) TAX TREATMENT — INCOME AND CGT: a special election can be made under ITA 2007 s.30 and TCGA 1992 s.3A to apply the VULNERABLE BENEFICIARY CONCESSION. This means the trustees pay income tax and CGT as if the beneficiary had received the income/gain directly — taxed at the beneficiary's lower personal rates rather than the trust rates. The additional rate band for the trust does not apply. The tax saving can be substantial if the beneficiary has no other income; (4) TRUST REGISTRATION SERVICE (TRS): HMRC requires all UK express trusts to be registered with the TRS (implementing AMLD5). Registration is required within 90 days of: (a) the trust coming into existence (death of the testator); (b) any trustee becoming aware the trust has incurred a UK tax liability. EXEMPT trusts (which do NOT need to register): (a) bare trusts where a young person becomes entitled at 18 under intestacy; (b) charitable trusts; (c) pilot trusts (under £100 settled before 6 October 2020); (d) trusts that already appear on another HMRC register; Testamentary trusts that ARE NOT EXEMPT must register on TRS — this includes most discretionary and life interest testamentary trusts that remain in existence for more than two years; (5) SA900 ANNUAL RETURNS: trustees of testamentary trusts must complete HMRC SA900 trust tax returns annually if the trust has taxable income or gains above the reporting threshold.