Discretionary Trusts

Setting up a discretionary trust hands a group of assets to trustees along with genuine discretion over who benefits and when, rather than promising anyone a fixed share on a fixed date. That flexibility is the whole point of the structure, but it comes with its own tax rules and ongoing duties that catch a lot of families out. This guide sets out how a discretionary trust actually works, not just in theory.

What actually makes a trust discretionary

A trust only counts as discretionary if the trustees, not the settlor and not the beneficiaries, decide how income and capital are shared out. The trust deed usually names a class of potential beneficiaries, perhaps children, grandchildren or a wider family group, without giving any one of them a guaranteed share or a fixed date for receiving anything. This sits in contrast to a life interest trust, where one named beneficiary has a fixed right to income for a set period. Our guide on life interest trusts in your will looks at that alternative in more detail if you are deciding between the two.

Who is involved and what they actually do

A discretionary trust has three groups of people: the settlor who creates it and decides what goes in, the trustees who manage the assets and make the distribution decisions, and the beneficiaries who may benefit at the trustees' discretion. Trustees are often a mix of family members and a professional trustee, particularly on a trust likely to run for years, and they typically work from a letter of wishes left by the settlor. That letter is not legally binding, but it gives trustees a clear steer on how the settlor expected decisions to be made once they are no longer able to guide things directly.

How discretionary trusts are actually taxed

Discretionary trusts sit inside one of the more demanding parts of the tax system, and the figures below apply for the 2026/27 tax year (they are reviewed at every Budget, so it is worth checking the current position before acting on them). Each trust has a small tax free band, currently £500 of income, shared between multiple trusts if the same person has set up more than one. Once income goes above that figure, tax applies to all of it rather than just the excess, at 45% on rental, interest and most other income and 39.35% on dividends. Capital gains are taxed at 24%, using an annual exempt amount of only £1,500, half of what an individual gets. Putting assets into the trust in the first place can also trigger an immediate inheritance tax charge of 20% on anything above the nil rate band, currently £325,000, and the trust then faces a further charge of up to 6% of its value every ten years for as long as it continues. An exit charge, worked out on a similar basis and reduced pro rata, can also apply when capital leaves the trust between those ten-year anniversaries. A discretionary trust does not remove inheritance tax altogether, a misconception we unpick in our guide on whether a trust means you won't need probate or pay inheritance tax; it is closer to the truth to say the tax is restructured rather than avoided. Alongside all of this, most trusts, including many with no tax to pay in a given year, still need to register with the Trust Registration Service, generally within ninety days of being set up.

When a discretionary trust might suit your family

Families most often reach for a discretionary trust to provide for children or grandchildren without handing over full control the moment they turn eighteen, to protect a beneficiary who is vulnerable or not yet able to manage money well, or to build flexibility into later life and inheritance tax planning where circumstances are likely to change. Because the trustees retain discretion, the trust can adapt as those circumstances shift in a way a fixed trust cannot. Where a discretionary trust is written into a will rather than set up during your lifetime, it is worth reading alongside our guide on what a will trust is to see how the two ideas fit together, and our trust and tax implications of your will guide for the wider picture of how a trust interacts with the rest of your estate.

Frequently Asked Questions

Who actually controls a discretionary trust?

The trustees control it, deciding how and when beneficiaries receive income or capital, guided by a letter of wishes from the person who set the trust up. Beneficiaries have no automatic entitlement to a fixed share, however closely related they are to the settlor.

What tax does a discretionary trust pay on its income?

For 2026/27, income above the trust's £500 tax free band is taxed at 45% on rental, interest and most other income, and at 39.35% on dividends, with the whole amount taxed once the £500 is exceeded rather than only the excess. Distributions to beneficiaries carry a tax credit that lower rate taxpayers can often reclaim.

Does a discretionary trust need to be registered anywhere?

Yes, almost all trusts now need to register with the Trust Registration Service, including many with no tax to pay, generally within ninety days of being created. This applies to most new and existing discretionary trusts alike.

How Roche Legal Can Help

If you are weighing up whether a discretionary trust fits your family, book a discovery call with our trusts and tax team.

Roche Legal is a firm of solicitors in England and Wales, and the information on our website is based on the law here. We regularly advise on estates with assets, beneficiaries or family overseas, so please do get in touch if that's your situation.