Deciding to write a life insurance policy in trust is the easy part, and the part most articles stop at. Then the insurer sends the forms, and there are two of them, and nothing in the covering letter explains which one you want.
The names do not help. "Bare" and "absolute" mean the same thing. "Discretionary" and "flexible" usually do too. Underneath the vocabulary there is one real decision, and it has almost nothing to do with tax.
The decision you are actually making
Who chooses where the money goes — you, now, or your trustees, then?
A bare trust is you choosing now. You name the beneficiaries, they become absolutely entitled to their share, and that entitlement is fixed. The trustees hold the policy, but they have no say in who benefits.
A discretionary trust is your trustees choosing then. You name a class of potential beneficiaries — typically drawn widely — and the trustees decide who actually receives what, and when, after the money arrives. You guide them with a letter of wishes, which is not binding but is what any sensible trustee follows.
Everything else follows from that.
Bare trust: certainty, and no way back
The appeal is simplicity. The beneficiary is identified, their share is theirs, and when the claim is paid the trustees hand it over. There is little to argue about and little to administer.
For inheritance tax, a transfer into a bare trust is a potentially exempt transfer. HMRC's guidance is that transfers into a bare trust may be exempt from inheritance tax as long as the person making the transfer survives for seven years after making it. Survive the seven years and it drops out of the reckoning entirely.
The cost of that simplicity is rigidity, and it is easy to underrate at the moment of signing. A bare trust cannot readily be redirected. Consider what that means over the life of a 25-year term policy:
- A beneficiary who is a child becomes absolutely entitled at 18 in England and Wales. Not when they are sensible. At 18.
- A relationship that ends does not remove a named adult beneficiary.
- A child born after the trust is made is not in it.
- A beneficiary who predeceases you creates a complication their own estate inherits.
If the right answer genuinely will not change — a single adult child, a business partner, a specific person whose position is settled — a bare trust is clean and does the job. If you find yourself thinking "well, probably", that is the wrong instrument.
Discretionary trust: flexibility, with a tax regime attached
A discretionary trust solves every one of those problems. Trustees can respond to circumstances two decades after you signed anything: pay a young beneficiary in stages, skip an adult whose situation makes a lump sum unwise, include a child who did not exist when the trust was made.
The trade is that discretionary trusts sit inside what HMRC calls the relevant property regime, and it has its own charges:
- A lifetime entry charge of 20% on the value transferred in, to the extent it exceeds the available nil-rate band.
- A principal charge at each ten-year anniversary of up to 6% of the value of the relevant property held.
- Exit charges when property leaves the trust.
HMRC explains the design plainly: the intention is that inheritance tax on relevant property trusts should be comparable to a charge of 40% once a generation, achieved through a 20% entry charge and three ten-year charges at 6% — three tenths of 20%.
Read on paper, that sounds alarming for a policy worth half a million pounds. In practice, for pure protection cover, it usually is not.
Why those charges rarely bite on a protection policy
The charges apply to the value of what the trust holds, measured when the charge arises. They do not apply to the sum assured as a notional figure.
While you are alive and well, a term assurance policy with no surrender value is worth very little. It is a contingent promise, not a fund. So the amount transferred in at the outset is typically small — far below the nil-rate band — and a ten-year anniversary falling during the term is measuring an asset that has no meaningful market value.
The charges are a genuine feature of discretionary trusts and they matter a great deal for trusts holding invested capital. For a term policy whose only event is a claim, they are usually close to academic. That is the single most useful thing to understand here, because fear of the ten-year charge is the most common reason people talk themselves out of the more flexible option — and it is usually the wrong reason.
It is a different calculation for whole-of-life or investment-linked policies that carry a real surrender value, and for those the numbers deserve proper advice.
Registering the trust, and when you need not
Creating a trust raises the question of HMRC's Trust Registration Service. Many people assume registration is automatic and unavoidable. For protection policies it frequently is not.
HMRC's Trust Registration Service manual excludes trusts holding a policy that pays out only on death, critical illness or disability, and which cannot be surrendered during its term. A term life policy of exactly that description is excluded from registration.
The exclusion does not vanish the moment a claim is paid. A trust holding an excluded policy continues to be excluded after the death of the person assured, and the trustees have two years from that death to distribute the funds before registration becomes necessary.
The distinction to watch is whether the policy can pay out during its term. Products designed to provide regular or periodic payments, or that permit part or full surrender — investment bonds, for example — are treated differently, and the exclusion does not apply.
Which one suits which situation
A bare trust is usually right when:
- there is one obvious adult beneficiary whose position will not change
- you want the money paid out promptly with no judgement exercised
- the beneficiary reaching 18 with full access is not a concern — because they already have
A discretionary trust is usually right when:
- beneficiaries are young, or not yet born
- your partner is not your spouse, so the spouse exemption does not apply and flexibility matters more
- the family might reasonably look different in fifteen years
- you want trustees able to stage payments rather than hand over a lump sum
Most insurers offer both as standard forms at no cost, and completing one at application is the cheap moment. Doing it later is usually still possible, but it is a transfer with its own considerations.
One thing neither trust fixes: a trust deals with one asset. It does not decide anything else about your estate, and it is no substitute for a will. What happens without one is set out in the guide to who inherits when there is no will, and the wider allowances your estate can use are covered in the residence nil-rate band explained.
This article explains how the two structures differ. It is not advice on your circumstances, and trust choice is an area where a solicitor or a chartered tax adviser earns their fee — particularly for anything other than straightforward term cover.
Sources
- GOV.UK — Trusts and Inheritance Tax (opens in a new tab)
- HMRC Inheritance Tax Manual IHTM42001 — Relevant property trusts: introduction (opens in a new tab)
- HMRC Inheritance Tax Manual IHTM42081 — Ten year anniversary: introduction (opens in a new tab)
- HMRC Inheritance Tax Manual IHTM42070 — Relevant property trusts: chargeable events (opens in a new tab)
- HMRC Trust Registration Service Manual TRSM23030 — insurance policies and compensation pay-outs (opens in a new tab)
This article is general information for a United Kingdom audience. It is not financial, tax or legal advice. Trust and inheritance tax rules change, and the right structure depends on the policy, the family circumstances and the wider estate — particularly for whole-of-life or investment-linked cover, which is treated differently from term assurance. Take advice from a solicitor or a chartered tax adviser before relying on any of this. Last reviewed 12 September 2026.
