Discretionary Trust
A trust where trustees have full discretion over distributions to beneficiaries. Used for control, succession planning, and protecting assets across generations.
By Omair SaoLast reviewed — rates for the 2026/27 tax year. See how we check our figures.
How It Works
The settlor transfers assets to trustees who manage them for a class of beneficiaries. Trustees decide who receives income and capital. No beneficiary has an automatic right. The trust can last up to 125 years. The settlor guides via a letter of wishes.
Tax Treatment
Trust income taxed at 45% (39.35% dividends). CGT at 20%. IHT entry charge of 20% above £325,000. 10-year periodic charges up to 6%. Distributions carry tax credits for lower-rate beneficiaries.
Tax Advantages
- Control over when and how beneficiaries receive wealth
- Asset protection from creditors, divorce, or bankruptcy
- Lower-rate beneficiaries can reclaim excess trust tax
- Flexible — beneficiaries can be added or removed
Who Is This Suitable For?
High-net-worth families wanting to control when and how wealth passes to beneficiaries. Protects assets from divorce, bankruptcy, or irresponsible spending.
Worked Example: £325,000 settled into a discretionary trust
- 1You transfer £325,000 of investments into a discretionary trust for your children and future grandchildren.
- 2That equals the nil-rate band, so there is no 20% entry charge, provided you made no other chargeable transfers in the previous seven years.
- 3At the tenth anniversary the fund is worth £425,000; the periodic charge applies to the £100,000 above the nil-rate band at up to 6% — at most £6,000.
- 4An income payment to a grandchild who pays no tax carries a credit, and they can reclaim some or all of the tax the trustees paid.
Result: A modest tax cost each decade buys control over the money and keeps it, and its growth, outside your estate once seven years have passed.
Illustrative figures using the 2026/27 rules on this page, last checked on 25 September 2026.
Advantages and Drawbacks
Advantages
- Beneficiaries have no fixed entitlement, so a divorce, bankruptcy or poor decision by one of them does not expose the fund.
- You can add or remove beneficiaries, leave a letter of wishes, and the trust can run for up to 125 years.
- A trust can hold company shares, property and investment bonds as well as funds.
Drawbacks
- Transfers above the available nil-rate band are taxed at 20% immediately, with more to pay if you die within seven years.
- Trust income is taxed at the highest rates and trustees must file returns, so administration costs are ongoing.
- If you or your spouse can benefit, the trust is settlor-interested: income is taxed on you and the assets stay in your estate.
- The trust must be registered with HMRC, usually within 90 days, with a possible £5,000 penalty for failing to do so.
Notes for Limited Company Owners
Owners sometimes settle shares in a trading company into a discretionary trust: if the shares qualify for Business Relief, the transfer may carry little or no entry charge, and future growth is kept outside the estate. Dividends on trust-held shares are taxed at the trust rate before any distribution, so this suits growth shares more than income shares.
Common Mistakes
- Settling more than the nil-rate band in one go and paying a 20% charge that phasing gifts over seven years would have avoided.
- Appointing only family trustees who never keep records or make decisions formally.
- Placing the family home in trust while continuing to live in it, which brings it straight back into the estate.
Who Should Avoid It
People with estates under the nil-rate band, or who cannot afford to give up access to the money permanently, will find the costs and paperwork outweigh any benefit.
Official Sources
The rules on this page come from the following official pages and were checked on 25 September 2026. Read how we check our figures.
Related Calculators
Frequently Asked Questions
What is the 10-year charge?
Every 10 years, HMRC charges up to 6% of the trust value above the nil-rate band (£325,000). The exact rate depends on value and distributions made.
Who should be trustees?
Common choices: family members, solicitor, or professional trust company. Having at least one independent trustee is advisable.
Can the settlor benefit?
If the settlor can benefit (settlor-interested trust), all income and gains are taxed on the settlor, and assets remain in their estate for IHT.