4.5 Trusts: Structure, Purpose and Types

CeMAP Module 1 Financial Services, Regulation and Ethics

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1 Introduction

1.1 About the CeMAP Module 1 (FSRE) Exam 1.2 How to Use This Study Guide

2 UK Financial Services Industry and the Wider Economy

2.1 Purpose and Role of Money and Financial Markets 2.2 Structure of UK and International Financial Markets 2.3 Types of Main Markets and Market Participants 2.4 Asset Classes and Their Characteristics 2.5 The UK Government, EU Influence and International Standards 2.6 Bank of England, Financial Institutions and Financial Crime

3 Serving the Retail Consumer

3.1 Consumer Perceptions and Firm Obligations 3.2 Consumer Financial Needs and How They Are Met 3.3 Product Types and Their Functions

4 Legal Concepts for Financial Advice

4.1 Legal Entities and Powers of Attorney 4.2 Law of Contract and Agency 4.3 Property Ownership, Insolvency and Bankruptcy 4.4 Wills and Intestacy 4.5 Trusts: Structure, Purpose and Types

5 Development of UK Financial Services Regulation

5.1 History of UK Regulation 1986–2021 5.2 The UK Regulatory Framework and Other Regulators 5.3 Additional Oversight: Senior Management, Auditors, Trustees and External Compliance

6 The FCA and PRA and Their Handbook

6.1 FCA and PRA: Statutory and Operational Objectives 6.2 Principles-Based Regulation, Duties and Enforcement Powers 6.3 Purpose and Structure of the FCA Handbook 6.4 High-Level Standards and the Training and Competence (T&C) Regime 6.5 Prudential Standards, CASS and the SMCR 6.6 Conduct of Business (COBS) Rules 6.7 Regulatory Processes, Regulated Activities and Authorisation

7 Advising Clients: Skills and Process

7.1 Communication Skills for Advisers 7.2 Gathering Information and the Fact-Find 7.3 Assessment, Analysis and Identifying Appropriate Solutions 7.4 Recommendations, Conclusions and Insistent Clients

8 Principles for Businesses and Conduct Rules

8.1 Principles for Businesses and Conduct of Business Rules 8.2 Preventing Harm, the Market Conduct Code (MAR) and Conduct Risk 8.3 Corporate Culture, Leadership and Senior Management Responsibilities 8.4 Consumer Rights and Unfair Contract Terms

9 Regulatory Framework Rules and Consumer Protection

9.1 Record Keeping, Reporting and Notification Requirements 9.2 Anti-Money Laundering and Proceeds of Crime 9.3 Data Protection and Data Security 9.4 Complaint Handling and the Financial Ombudsman Service 9.5 FSCS, Treating Customers Fairly and Conduct Risk

10 The Regulatory Advice Framework

10.1 Client Relationships, Adviser Responsibilities and Types of Clients 10.2 Fiduciary Relationships and Types of Service Provision 10.3 Disclosure Requirements and Adviser Charging 10.4 Limitations to Authority, Cancellation Rights and Vulnerable Clients 10.5 Regulated Advice Standards and Due Diligence on Products 10.6 Monitoring and Reviewing Client Circumstances

11 Ethics and Professional Behaviour

11.1 Core Ethical Theories, Principles and Values 11.2 Impact of Ethical Principles and Professional Codes of Conduct 11.3 The Code of Ethics and Resolving Ethical Dilemmas 11.4 Business Ethics, Whistleblowing and Ethical Culture 11.5 Professionalism, CPD and Ethical vs Compliance-Driven Behaviour

4.5 Trusts: Structure, Purpose and Types

Key Takeaways Explain This Topic AI

A trust splits legal ownership (trustees) from beneficial ownership (beneficiaries); the settlor creates the trust and provides the trust property

Bare trusts give the beneficiary an absolute entitlement; interest in possession trusts give a life tenant a current right to income; discretionary trusts give trustees wide discretion over income and capital

Discretionary (relevant property) trusts face entry charges, ten-year anniversary charges, and exit charges for inheritance tax

Trustees' CGT annual exemption is half the individual amount, and trustees pay CGT at the trust rate on disposals

Trusts are commonly used in financial planning to hold life policies, pension death benefits, investment bonds, and business property outside the client's estate

Last updated: July 2026

Trusts are a foundational estate-planning tool. CeMAP advisers must be able to explain the structure, identify the main types, and understand how trusts interact with UK tax and the advice process.

Trust Structure

A trust is an arrangement where one person (the settlor ) transfers assets to another (the trustee ) to hold for the benefit of one or more beneficiaries , or for a permitted purpose. The key elements are:

Settlor — the person who creates the trust and provides the trust property.

Trustee — the legal owner of the trust property, holding it on the terms set out in the trust deed. Trustees owe fiduciary duties to the beneficiaries.

Beneficiary — the person with a beneficial (equitable) interest under the trust.

Trust property — the assets held within the trust (cash, land, shares, life policies, etc.).

Trust deed — the document (sometimes a declaration of trust) setting out the trustees' powers and the beneficiaries' entitlements.

The split between legal ownership (trustees) and beneficial ownership (beneficiaries) is the defining feature of an English-law trust.

Purpose of Trusts

Trusts are used to:

Hold assets for minors who cannot legally own property in their own right.

Provide for vulnerable beneficiaries without giving them outright control.

Control the timing of inheritance (e.g. age 25).

Reduce inheritance tax exposure by removing assets from the settlor's estate.

Hold life insurance policies outside the estate so the payout does not form part of the estate for IHT.

Provide for a spouse during their lifetime while preserving capital for children of an earlier relationship.

Manage charitable or purpose-driven giving.

Main Types of Trust
Bare Trust

A bare trust (also called a simple trust ) is the simplest form.

The beneficiary is absolutely entitled to the trust property and any income.

The trustee's role is essentially custodial: they hold legal title until the beneficiary reaches 18 (in England & Wales) or comes of age.

Common for Junior ISAs, child savings accounts, and gifts to minor grandchildren.

Interest in Possession Trust

In an interest in possession (IIP) trust , a beneficiary (the life tenant ) has a current right to receive income from the trust property for a period (often their lifetime).

The life tenant does not own the capital, but is entitled to the income as it arises.

On the life tenant's death, the capital passes to remaindermen named in the trust.

Common in wills where the deceased leaves a life interest to a spouse and the capital to children.

Discretionary Trust

In a discretionary trust , the trustees have discretion over which beneficiaries receive income or capital, how much, and when.

Beneficiaries have only a hope of benefit, not an entitlement.

Suitable where beneficiaries may be unsuitable to manage money, or where future needs are uncertain.

Often used for vulnerable or spendthrift beneficiaries, disabled beneficiaries, and tax planning.

Accumulation Trust

An accumulation trust allows trustees to either distribute income to beneficiaries or accumulate it (add it to capital).

Often combined with discretionary features (accumulation and maintenance trusts, historically).

Powers to accumulate are limited by the Law of Property Act 1925.

Life Interest Trust

A life interest trust gives a beneficiary an interest in possession for life, often in a residential property. A common variant is the right to reside trust, which gives the beneficiary the right to live in a property without owning it.

Mixed and Hybrid Trusts

Trusts can combine features — for example, an interest in possession for a surviving spouse during their lifetime, then discretionary for children after death.

Trust type Beneficiary entitlement Trustee discretion
Bare Absolute, immediate None — purely custodial
Interest in possession Income to life tenant Limited to administrative
Discretionary Hope only Wide — over income and capital
Accumulation Income may be accumulated or paid Within statutory accumulation periods
Life interest Right to occupy or receive income Limited
UK Tax Treatment (Overview)

Trusts are subject to a distinct tax regime. The regime is complex; this overview covers the principles.

Income Tax

Bare trusts : income is treated as the beneficiary's and taxed at their marginal rates.

Interest in possession trusts : income is taxed at the trust rate (currently 45%) on the trustees, with the life tenant receiving a credit and reclaiming any overpayment through self-assessment.

Discretionary trusts : income within the standard rate band (currently £1,000) is taxed at lower rates (20% income / 10% dividends); above that, the trust rate of 45% (39.35% for dividend income) applies.

Inheritance Tax (IHT)

Bare and IIP trusts created during lifetime: gifts into the trust are chargeable lifetime transfers (CLTs) if above the NRB; CLTs above the NRB trigger an immediate 20% charge.

Discretionary trusts : CLT regime on entry, plus ten-year anniversary charges and exit charges — the principal reason these are sometimes called "relevant property trusts."

Will trusts : most gifts by will are exempt transfers if made to a spouse or charity; an IIP trust for a surviving spouse qualifies for spouse exemption on first death.

Capital Gains Tax (CGT)

Trustees have an annual exemption (currently half the individual amount — £1,500 for 2026/27).

Transfers into trust are disposals for CGT but are usually held over so no immediate charge arises.

Disposals by trustees are charged at the trust rate of 24% for residential property and 24% for other assets (per 2026/27 rates).

Trusts in Financial Planning

Trusts commonly wrap:

Life insurance policies — written in trust so the payout reaches beneficiaries quickly and outside the estate.

Pension death benefits — the pension scheme administrator retains discretion under a nomination/expression of wish form, mimicking a discretionary trust.

Investment bonds — for tax-deferred growth and control over timing of chargeable event gains.

Estate planning for business property — business property relief can be combined with trusts to pass on trading businesses free of IHT.

Advisers should remind clients that:

Trusts are not always tax-positive — advice should compare the trust route with outright ownership.

Trustees must understand their duties and submit tax returns.

Beneficiaries' entitlements vary by trust type, and changing circumstances may require a deed of variation or court-approved variation under the Variation of Trusts Act 1958.