Discretionary Trust UK: How They Work, Tax Rules & Registration

At a glance

• What it is: a trust where trustees hold assets for a class of potential beneficiaries and decide who benefits, how much, and when — no beneficiary has a fixed entitlement.
• Key roles: settlor (creates and funds the trust), trustees (legal owners who manage the assets), beneficiaries (the class who may benefit), and optionally a protector.
• Letter of wishes: non-binding guidance from the settlor to the trustees — persuasive, not legally enforceable.
• Trustee duties: governed by the Trustee Act 2000, which imposes a statutory duty of care, investment duties, and powers of delegation. Where the trust holds land, the Trusts of Land and Appointment of Trustees Act 1996 gives trustees the powers of an absolute owner over that land.
• IHT regime: a discretionary trust sits within the "relevant property" regime — an entry charge of up to 20%, a charge at every ten-year anniversary, and exit charges when assets leave. The ten-year and exit charges are capped at 6%, but that is a maximum: the actual rate is calculated using a formula, and is very often lower (see below).
• The connecting factor changed on 6 April 2025. Domicile and "deemed domicile" no longer decide whether a settlor's non-UK assets are inside UK IHT. The test is now long-term UK residence — broadly, 10 or more of the previous 20 tax years spent UK resident (Finance Act 2025). This matters for any trust with a non-UK settlor, non-UK assets, or a settlor who has spent time abroad.
• NRB and RNRB are frozen at current levels through the tax year 2030–31 (i.e. until April 2031): the nil-rate band stays at £325,000 and the residence nil-rate band at £175,000, confirmed at the 26 November 2025 Budget.
• Income tax: trust income taxed at 45% (most income) or 39.35% (dividend-type income), after a small tax-free amount (normally £500) — verify current rates on GOV.UK.
• CGT: trustees pay Capital Gains Tax at a flat rate of 24% on gains above the annual exempt amount — £1,500 for 2026–27 (£3,000 if a beneficiary is vulnerable).
• Registration: most discretionary trusts must register with HMRC's Trust Registration Service, under rules reformed from 30 June 2026.
• Perpetuity period: most new trusts in England and Wales can run for up to 125 years (Perpetuities and Accumulations Act 2009).
• This guide covers England and Wales. Some rules differ in Scotland and Northern Ireland.

This guide provides general information only and is not legal advice. Tax rates and rules change — always check GOV.UK for current figures and take professional advice before acting.

What is a discretionary trust?

A discretionary trust is an arrangement where you — the settlor — transfer assets into the legal ownership of trustees. Those trustees hold and manage the assets for a defined class of potential beneficiaries — for example, "my children and grandchildren, including any born in future."

The crucial feature is that no one in that class has a fixed right to the income or the capital. The trustees decide who receives what, how much, and when. They are guided by the trust deed and by any letter of wishes you leave behind.

Because nothing is guaranteed to any individual, the trust can respond to changes in family circumstances over many years: a beneficiary who is too young now, who struggles with money later, or whose personal circumstances make an outright gift unwise.

Compare this with a bare trust, where a beneficiary is absolutely entitled to both income and assets, or an interest in possession trust, where a beneficiary is entitled to income as it arises. In a discretionary trust, the trustees' discretion is the defining feature.

A discretionary trust sits within its own tax regime — known as the relevant-property regime — with charges on entry, at each ten-year anniversary, and on exit. That makes it a structure worth thinking about carefully, not setting up casually.

The four key roles

The settlor

The settlor creates the trust and transfers assets into it. Once assets are transferred, they legally belong to the trust — not to the settlor. The settlor can, however, leave a letter of wishes to guide the trustees on how they would like the trust fund to be managed and distributed.

A settlor can act as a trustee of their own trust, but this has tax consequences: HMRC's settlor-interested rules can attribute trust income and gains back to the settlor personally if the settlor, their spouse or civil partner could benefit from the trust. For a clean tax position and stronger asset-protection arguments, it is often preferable for the settlor not to be a trustee.

The trustees

Trustees take legal title to the trust assets and bear responsibility for managing them for the benefit of the beneficiaries. Their duties are now governed primarily by the Trustee Act 2000, which:

• imposes a statutory duty of care — trustees must exercise such care and skill as is reasonable in the circumstances, having regard to any special expertise they have or hold themselves out as having;
• sets out the general power of investment — trustees can make any kind of investment that a prudent investor might make, subject to the need for diversification and periodic review;
• permits delegation of certain investment and administrative functions to agents, subject to a written agreement and ongoing oversight.

Trustees also have fiduciary duties developed by equity: to act in the best interests of the beneficiaries as a whole, not to profit from the trust, and to avoid conflicts of interest.

Many settlors appoint a mix of family members and a professional trustee (a solicitor or trust company) to balance personal knowledge of the family with professional accountability. Think about successor trustees too — a trust may run for decades.

The beneficiaries

Beneficiaries are the class of people who may benefit from the trust. In a discretionary trust they have a right to be considered but not a right to receive anything. Describing the class accurately in the trust deed matters: it is hard to add someone later, and misdescription can cause problems for the trustees and the trust's tax position.

The class can include people not yet born — for example "children and remoter issue" — automatically pulling in future grandchildren. Most trust deeds also name a default beneficiary (sometimes a charity) who takes any assets remaining if the trust winds up without full distribution.

The letter of wishes

A letter of wishes is a private, non-binding document from the settlor to the trustees. It might explain the settlor's priorities, describe the financial circumstances of individual beneficiaries, or set out preferences about investment. Trustees are not legally required to follow it, but they must take it into account when exercising their discretion. Because it is not part of the trust deed, it can be updated without formality — a significant practical advantage as family circumstances change.

Trustees' powers over land: the Trusts of Land and Appointment of Trustees Act 1996

Where a discretionary trust holds land — most commonly a family home placed into a discretionary will trust, or a rental property bought as a trust investment — the trustees' powers and duties in relation to that land sit alongside the Trustee Act 2000 duties above, in the Trusts of Land and Appointment of Trustees Act 1996 (TLATA 1996).

General powers of an absolute owner. Section 6 of TLATA 1996 gives trustees of land "all the powers of an absolute owner" in relation to that land — they can sell, lease, mortgage or otherwise deal with it as a full legal owner could, subject to the trust deed and to their fiduciary duties. Trustees must have regard to the rights of the beneficiaries when exercising these powers, and the powers cannot be used to breach any other enactment, court order, or rule of law or equity. A later amendment (made when the Trustee Act 2000 was introduced) added section 6(9), which expressly applies the Trustee Act 2000's statutory duty of care to trustees of land exercising these powers — so the same standard of skill and care that governs a trustee's investment decisions also governs decisions about the trust's land.

Appointing or retiring trustees — a mechanism that rarely applies to a live discretionary trust. Sections 19 to 21 of TLATA 1996 let beneficiaries direct the appointment or retirement of trustees, but only where two conditions are both met: the trust deed does not already nominate someone to make appointments, and the beneficiaries — taken together — are of full age and capacity and absolutely entitled to the trust property. That second condition is the one that matters for a discretionary trust: because no beneficiary, or group of beneficiaries, has a fixed and absolute entitlement while the trust remains discretionary, the section 19 mechanism does not normally apply during the trust's ordinary life. It becomes relevant only once the trust has effectively wound down to the point where the remaining beneficiaries are collectively and absolutely entitled to what is left — typically close to final distribution. Outside that situation, appointing or removing the trustees of a discretionary trust is governed by the trust deed itself and by the general trustee-appointment provisions in section 36 of the Trustee Act 1925, not by TLATA 1996.

This is a distinction that generic "how to change your trustees" guidance often misses — the beneficiary-directed route under TLATA 1996 is built for bare and absolute trusts, not for a discretionary trust that is still operating as intended.

How a discretionary trust is set up

1. Clarify the purpose. Be clear on the underlying goal before any drafting begins. Is it protecting assets for young children? Providing long-term support for a vulnerable relative? Keeping wealth out of a beneficiary's estate for IHT or creditor reasons? The purpose shapes every later decision — who the trustees are, what powers they hold, what the letter of wishes says.

2. Choose trustees carefully. Trustees take on legal responsibility for potentially decades. Choose people who are organised, discreet, and willing to act for the long term. Consider professional input, especially for larger trust funds. Establish a clear succession plan — who will take over when an original trustee retires or dies?

3. Define the beneficiary class. Describe the class of potential beneficiaries with precision. Broadly drafted classes give trustees maximum flexibility; tightly drafted ones create certainty but can exclude people you later want to include. Consider whether you want to include future-born descendants and whether anyone should be explicitly excluded.

4. Have the trust deed professionally drafted. The trust deed is the governing document. It sets out the trustees' powers (investment, accumulation, advancement, appointment), the beneficiary class, the trust period, and what happens on final distribution. The deed must be executed with appropriate formality. If land is being transferred into the trust, there are additional Land Registry requirements, and the trustees will hold and manage that land under the TLATA 1996 powers described above.

5. Register the trust. Most discretionary trusts must register on HMRC's Trust Registration Service and keep the registration up to date. See the section on registration below for when this applies and the current exemptions.

6. Fund the trust and run it properly. Transfer the chosen assets into the trustees' names. Trustees should then meet periodically to review investments, consider distributions, and keep written records of the reasoning behind decisions — good record-keeping is essential for demonstrating that trustees are acting in the beneficiaries' interests, and for dealing with any future tax enquiries.

The relevant-property IHT regime

When a discretionary trust is created, its assets fall within what HMRC calls the relevant-property regime. This creates three types of IHT charge, each governed by the Inheritance Tax Act 1984 and explained in detail at gov.uk/guidance/trusts-and-inheritance-tax.

The entry charge

When assets are transferred into a discretionary trust during a settlor's lifetime, there may be an IHT charge on the amount above the settlor's available nil-rate band (£325,000, fixed at that level until April 2031 — see below).

The entry charge is calculated by adding the value of the transfer to any chargeable gifts made by the settlor in the previous seven years. Tax is charged at 20% on the excess above the nil-rate band if the trustees pay; if the settlor pays instead, a grossing-up calculation applies and the effective rate is higher.

If the settlor dies within seven years of making the transfer, the entry charge is recalculated at the full 40% IHT rate, with a credit for the 20% already paid. The trustees become liable for any additional tax.

The ten-year anniversary charge (periodic charge)

Every ten years from the date the trust was established, HMRC charges IHT on the net value of relevant property held in the trust on the day before that anniversary.

The often-quoted "6%" is a ceiling, not the actual rate. HMRC's own explanation of the mechanism (Inheritance Tax Manual IHTM42085) sets out the calculation:

1. Work out a notional lifetime transfer — broadly, the current value of the relevant property in the trust on the day before the anniversary, plus certain historic related-property and same-day-addition values where they apply.
2. Deduct the nil-rate band available against that notional transfer (reduced for any of the settlor's chargeable transfers in the seven years before the trust was set up).
3. Apply 20% to what is left, to get a notional amount of tax: Notional IHT = (notional lifetime transfer − available nil-rate band) × 20%.
4. Divide that notional tax by the notional lifetime transfer to get an effective rate, then multiply by 30% — because the underlying design charges the trust at three-tenths of the 20% lifetime rate at each ten-year point, so that three ten-year charges plus the original entry charge broadly mirror a single 40% charge once a generation.

Because the settlor's available nil-rate band and prior chargeable transfers both feed into the calculation, many discretionary trusts holding assets at or below the nil-rate band pay no tax at all at a ten-year anniversary, and larger trusts frequently pay well under the 6% maximum. Trustees should still plan for the possibility of a charge — it does not depend on any distribution being made, and HMRC provides a quarters calculator to help with the detailed arithmetic where assets have not been relevant property for the whole ten years.

Exit charges

When capital or other assets leave the trust — whether by distribution to a beneficiary, by the trust ending, or by other specified events — an exit charge may arise. As with the ten-year charge, the maximum rate is 6%, but the actual rate depends on when in the ten-year cycle the exit occurs (broadly, a proportion of the rate set at the last ten-year anniversary, based on the number of complete quarters that have passed) and how much of the nil-rate band was available.

There are limited exceptions: no exit charge applies, for example, if assets leave within the first three months of the trust being set up, or within three months of a ten-year anniversary, or where the payment represents the trustees' costs and expenses on relevant property.

These calculations are complex. Trustees must use form IHT100 to report chargeable events and pay tax by the end of the sixth month after the event.

Will trusts and the residence nil-rate band

One commonly misunderstood point: if a home is placed into a discretionary will trust on death, the deceased's estate will not normally qualify for the residence nil-rate band (RNRB), even if the ultimate beneficiaries are the deceased's direct descendants. Because the trustees — not the beneficiaries — have discretion over the home, it is not treated as passing directly to a descendant. This can be a significant cost in estates affected by the RNRB. The HMRC guidance on this is at gov.uk/guidance/inheritance-tax-residence-nil-rate-band. Specialist advice is essential before using a discretionary will trust for the family home.

Cross-border settlors: domicile is no longer the test

Anyone who set up, or is thinking about setting up, a trust involving a non-UK settlor, non-UK assets, or time spent living outside the UK needs to know that the rules changed fundamentally from 6 April 2025.

Before that date, whether a settlor's non-UK assets fell inside or outside the scope of UK IHT depended on their domicile or "deemed domicile" — a common-law and statutory concept built around where someone was permanently based. GOV.UK's guidance on the old deemed domicile rules is explicit that it should not be followed for any death or transfer on or after 6 April 2025.

Finance Act 2025 replaced domicile, for IHT purposes, with the long-term UK residence test, inserting new sections 6A to 6C into the Inheritance Tax Act 1984. Under this test, an individual is a "long-term UK resident" in a tax year if they have been UK tax resident for:

• the previous 10 consecutive tax years, or
• a total of 10 or more of the previous 20 tax years.

Someone who leaves the UK does not immediately drop out of scope. Depending on how long they were resident before leaving, they can remain a long-term UK resident for a tapered period of between 3 and 10 further tax years after departure (HMRC Inheritance Tax Manual IHTM47020 sets out the exact table and worked examples). Domicile under general law still matters for some other purposes, but it is no longer the connecting factor for Inheritance Tax.

For a discretionary trust, the practical effect is on excluded property. GOV.UK's guidance on trusts and Inheritance Tax confirms that non-UK assets settled by someone are excluded property (broadly, outside the relevant-property regime) where, for charges arising on or after 6 April 2025, the settlor is not a long-term UK resident at the time of the charge, or was not a long-term UK resident when they died. Where the settlor is a long-term UK resident at the relevant time, non-UK trust assets they settled are brought within scope. There are separate transitional rules for trusts and settlors already in existence before 30 October 2024 and 6 April 2025.

This is a genuinely technical area, and getting the residence history wrong can mean a trust is taxed very differently from what was assumed. If any settlor, trustee, or the trust's asset mix has a cross-border element, take specialist advice on the long-term UK residence position rather than relying on older material — including some third-party guidance that has not caught up with the April 2025 change.

The nil-rate band and residence nil-rate band freeze

Separately from the connecting-factor change, the government confirmed at the 26 November 2025 Budget that the two IHT thresholds are being fixed for a further year. The nil-rate band stays at £325,000 and the residence nil-rate band at £175,000 (with its £2 million taper threshold also frozen), for the tax year 2030–31 as well as the years already fixed — meaning both thresholds are locked at current levels until April 2031 (GOV.UK policy paper, "Inheritance Tax — thresholds"). The nil-rate band has in fact been unchanged since 2009. This matters directly for discretionary trusts: the nil-rate band is the figure used in the entry charge, the ten-year anniversary calculation, and the exit charge calculation described above, so a frozen threshold means more trust value is drawn into charge over time as asset values rise.

Income tax in a discretionary trust

Trustees of discretionary and accumulation trusts are responsible for paying income tax on trust income. Per current GOV.UK guidance on trusts and Income Tax (verify for the applicable tax year, as rates and allowances can change):

| Type of income | Trust income tax rate | |---|---| | Dividend-type income | 39.35% | | All other income (interest, rental, other) | 45% |

Most discretionary and accumulation trusts have a small tax-free amount — normally £500 per tax year. Trustees do not qualify for the dividend allowance. If the settlor has set up more than one discretionary or accumulation trust, the £500 tax-free amount is divided equally between them; where a settlor has five or more such trusts, the tax-free amount for each trust falls to £100.

The high rate of income tax inside a discretionary trust is deliberate: it is designed to ensure that settlors cannot use trusts to shelter income at a lower rate than they would personally pay. However, when income is distributed to a beneficiary, the beneficiary can reclaim some or all of the tax, depending on their own personal tax position.

Trustees must file a Trust and Estate Tax Return (SA900) for each tax year in which the trust has taxable income or gains.

Capital Gains Tax in a discretionary trust

Trustees may have to pay Capital Gains Tax (CGT) when assets in the trust are sold or transferred at a gain. Per GOV.UK guidance on trusts and Capital Gains Tax, the trust's tax-free allowance (the "annual exempt amount") for the 2026–27 tax year is £1,500, or £3,000 if a beneficiary is vulnerable (a disabled person or a child whose parent has died) — check GOV.UK for current figures, as this changes each tax year and can be reduced further if the settlor has created more than one trust since 6 June 1978. This is significantly lower than the individual CGT exempt amount.

Once the annual exempt amount is used up, trustees pay Capital Gains Tax at a flat rate of 24% on the remaining taxable gain — a single rate that applies regardless of the type of asset. This is confirmed in current HMRC guidance on working out trust Capital Gains Tax, which also lists the rates that applied in earlier tax years — always check GOV.UK for the rate that applied when the gain actually arose, as this has changed more than once in recent years.

Where assets are transferred out to beneficiaries rather than sold, trustees and beneficiaries may be able to jointly elect for Hold-Over Relief, deferring the CGT until the beneficiary eventually disposes of the asset. Private Residence Relief can also apply where the trust owns a property that is the main residence of someone entitled to live there under the trust.

If the trust holds UK residential property, any gain must be reported and tax paid within 60 days of completion of the sale, using a Capital Gains Tax on UK property account.

Common uses for discretionary trusts

Protecting younger generations

Parents and grandparents frequently use discretionary trusts to provide for children and grandchildren without handing over capital outright at a young or financially inexperienced age. The trustees can release funds for education, housing deposits, or other needs as and when appropriate, and retain the capital until beneficiaries are mature enough to manage it responsibly.

Supporting vulnerable beneficiaries

Where a beneficiary has a disability, a mental health condition, an addiction, or simply struggles with money management, a discretionary trust means no lump sum ever lands in their hands. Because the beneficiary has no fixed entitlement, the trust fund is generally better protected from means-tested benefit assessments, though this is not an absolute guarantee and depends on how the trust is operated.

For beneficiaries who meet HMRC's definition of "vulnerable persons", a vulnerable persons trust may be more appropriate: it provides equivalent flexibility but benefits from a special tax regime that can significantly reduce the income tax and CGT burden. See gov.uk/trusts-taxes/trusts-for-vulnerable-people for the qualifying conditions.

Asset protection

Because no beneficiary owns or is entitled to any part of the trust fund, assets held in a discretionary trust are generally not available to a beneficiary's creditors or a divorcing spouse's claims. This protection is not automatic — courts can and do look behind trust arrangements in certain circumstances, particularly where the trust was set up in anticipation of a claim — but it is a genuine feature that distinguishes discretionary trusts from outright gifts.

Discretionary will trusts

A discretionary trust can be created by a will to come into effect on death, sometimes called a discretionary will trust or flexible legacy trust. The testator's executors transfer assets to the trustees named in the will, who then manage them for the benefit of the class defined in the will.

This is commonly used to retain flexibility where the testator is uncertain about beneficiaries' needs at the time of drafting, or to allow the trustees to respond to changes in tax law or family circumstances after the death. As noted above, however, discretionary will trusts do not attract the residence nil-rate band for the family home — a material planning point for many estates.

Trust Registration Service

Most express discretionary trusts in the UK must be registered with HMRC's Trust Registration Service (TRS). The registration framework was substantially reformed by the Money Laundering and Terrorist Financing (Amendment) Regulations 2026 (SI 2026/621), which came into force on 30 June 2026 and rewrote Schedule 3A to the Money Laundering Regulations 2017. Current HMRC guidance on the reformed rules is at gov.uk/guidance/check-if-you-need-to-register-a-trust — treat this as the up-to-date replacement for any older material still describing the pre-June-2026 exemption list.

Trusts liable for UK tax. Trustees must register a UK-resident trust — and a non-UK-resident trust with UK assets or income — that becomes liable for Capital Gains Tax, Income Tax, Inheritance Tax, Stamp Duty Land Tax, Land and Buildings Transaction Tax (Scotland), or Land Transaction Tax (Wales). This will apply to almost all discretionary trusts that receive income or hold assets likely to grow in value. One change worth flagging for anyone working from older material: Stamp Duty Reserve Tax no longer triggers registration on its own — the 2026 reforms removed it from the list of relevant taxes.

Non-taxable trusts — the Schedule 3A "excluded express trust" exclusions. Even where no tax is currently due, most UK-resident express trusts must still register unless they qualify as a Schedule 3A trust. The 2026 reforms introduced a new general exclusion for small, low-risk trusts: a trust does not need to register if it does not hold any interest in UK land, does not hold assets worth more than £2,000, has never held property with a cumulative value over £10,000, has no income over £5,000 a year, and has no UK tax liability. This general exclusion applies to only one trust per settlor — if a settlor has created more than one trust meeting the criteria, only one of them qualifies for it.

Beyond the general exclusion, the other Schedule 3A exclusions include: statutory trusts created by a court order or by law; trusts holding assets of a UK-registered pension scheme; trusts holding life or retirement policies that pay out only on death, illness or disability; UK-registered charitable trusts; bank accounts opened in trust for a child; will trusts that only hold estate assets and are closed within two years of death; "pilot" trusts set up before 6 October 2020 holding no more than £100; co-ownership trusts for property or other assets held as tenants in common; various commercial and financial-markets trusts created in the course of professional or business transactions; and, new from 2026, Scottish survivorship destination trusts and certain property co-ownership trusts that lose their exempt status only because a co-owning trustee has died. The full, current list is at gov.uk/guidance/check-if-you-need-to-register-a-trust.

Non-UK trusts holding UK land. The 2026 reforms also closed a gap for offshore trusts: a non-UK express trust that acquired an interest in UK land or property before 6 October 2020 and still held it when the new rules took effect must now register — previously only acquisitions after 6 October 2020 were caught. HMRC's guidance gives affected trustees until 1 September 2027 to register, though at the time of the guidance's most recent update the Trust Registration Service could not yet process these particular registrations — check GOV.UK for the current position before relying on this timetable.

Trustees must register using HMRC's online service (see gov.uk/guidance/register-a-trust) and keep the registration details up to date whenever there is a change to the trust or its beneficial owners. Failure to register, or to keep details current, can result in a penalty of up to £5,000. Registration does not replace any separate tax filing obligations the trust may have.

Practical checklist before committing

Before setting up a discretionary trust, work through these questions:

• What is the trust for? Is the goal clear enough to explain to a trustee in plain English?
• Is this the right structure? For a disabled or vulnerable beneficiary, a vulnerable persons trust may achieve the same flexibility with a better tax outcome.
• Can you live without the assets? Once transferred, assets belong to the trust. There is no mechanism to reclaim them simply because circumstances change.
• Who are your trustees, and do they understand the commitment? Trustees may serve for decades. Have you considered professional involvement?
• Have you modelled the tax? The entry charge, ten-year charges, exit charges, income tax, and CGT all need to be factored in — both now and over the projected life of the trust — using the nil-rate band figures that will actually apply (currently fixed until April 2031).
• Is there a cross-border element? If the settlor, a beneficiary, or the trust's assets have any connection outside the UK, get specific advice on the long-term UK residence position — this is no longer a question of domicile.
• Does your will need updating? A lifetime discretionary trust and a will trust may interact in ways that affect your estate planning.
• Have you checked the RNRB position? If your home is involved, specialist advice on the residence nil-rate band is essential before proceeding.
• Will the trust hold land? If so, check that the trust deed and your understanding of the trustees' powers reflect the TLATA 1996 position described above, and factor in the Land Registry formalities.
• Have you checked whether the trust needs to register? The Trust Registration Service rules changed on 30 June 2026 — confirm the current position rather than relying on an older exemption list.

This guide provides general information about discretionary trusts, their tax treatment, and registration obligations in England and Wales. It is not legal advice and is not a substitute for advice tailored to your specific circumstances — tax rates, thresholds, and Trust Registration Service rules change, and the rules affecting cross-border settlors and land held in trust are genuinely technical. The law described was accurate as at August 2026 and is subject to change — always check GOV.UK and legislation.gov.uk for the most current position, and take professional advice before setting up or amending a discretionary trust.

Last reviewed: August 2026 · Next review due: August 2027 or on legislative change.