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.
• IHT regime: a discretionary trust sits within the "relevant property" regime — entry charge of up to 20%, periodic ten-year anniversary charge, and exit charges of up to 6% (check gov.uk for current rates).
• Income tax: trust income taxed at 45% (most income) or 39.35% (dividends) for 2026-27 — verify current rates on GOV.UK.
• CGT: trustees have an annual exempt amount of £1,500 for 2026-27 (£3,000 if a beneficiary is vulnerable).
• Registration: most discretionary trusts must register with HMRC's Trust Registration Service.
• 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.

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.

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.

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 for 2025-26 — check GOV.UK for current figures).

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 maximum effective rate is 6% — calculated as 30% of the standard 20% rate, based on a hypothetical chargeable transfer. In practice the rate is often lower because the nil-rate band and previous transfers are taken into account in a complex formula.

The calculation involves the value of relevant property in the trust, the nil-rate band at the time of the charge, and the settlor's chargeable transfers in the seven years before the trust was set up. Trustees should plan for this charge — it does not depend on any distribution being made.

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. The maximum rate is 6%, but the actual rate depends on when in the ten-year cycle the exit occurs, the proportion of the nil-rate band used, and other factors set out in the HMRC calculation guidance.

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 trustee's costs and expenses on relevant property.

These calculations are complex. HMRC publishes detailed guidance at gov.uk/guidance/trusts-and-inheritance-tax. 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.

Income tax in a discretionary trust

Trustees of discretionary and accumulation trusts are responsible for paying income tax on trust income. The rates for 2026-27 (verify on GOV.UK as rates change each tax year) are:

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

Most trusts have a small tax-free amount — currently £500 per tax year. If the settlor has set up more than one discretionary or accumulation trust, this £500 is divided equally between them. Where a settlor has five or more such trusts, the tax-free limit 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. The trust's annual exempt amount (the "annual exempt amount" for trusts) is £1,500 for 2026-27, or £3,000 if a beneficiary is vulnerable — check GOV.UK for current figures. This is significantly lower than the individual CGT exempt amount.

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.

If the trust holds UK residential property, any gain must be reported and tax paid within 60 days of completion of the sale.

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). Registration is required in two main situations.

First, if the trust becomes liable for any UK tax — including IHT, income tax, CGT, SDLT, or SDRT — trustees must register. This will apply to almost all discretionary trusts that receive income or hold assets likely to grow in value.

Second, even if no tax is currently due, most non-exempt trusts must still register. The key exemptions for non-taxable trusts include trusts holding pension scheme assets, certain life policy trusts, charitable trusts, co-ownership trusts, and certain short-duration will trusts (up to two years from death). The full list of exemptions is published at gov.uk/trusts-taxes/registering-a-trust.

Trustees must register using HMRC's online service (for trustees: gov.uk/guidance/register-a-trust-as-a-trustee) and keep the registration details up to date whenever there is a change to the trust or its beneficial owners. Failure to register or keep details current can result in financial penalties. 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.
• 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.