Using a 3-degree-of-freedom lateral dynamic vehicle-trailer system model with the LuGre tyre model, this paper proposes a constrained unscented transformation based scheme for estimating the lateral velocity of a vehicle trailer. It is shown that the proposed lateral velocity estimation scheme is robust to the road condition. An affine quadratic stability approach is used to analyze the stability of the proposed estimation scheme. Simulations studies in CarSim/Simulink along with experimental tests are used to validate the proposed scheme. The test results confirm the accuracy of the developed estimation scheme and convergence of the vehicle-trailer lateral velocity estimate to the actual value.