Discretionary trusts explained

This page is about one type. For how it compares with bare, interest in possession, will, loan and gift trusts, see types of trust.

What a discretionary trust actually is

You transfer assets to trustees. The trustees hold them for a class of beneficiaries, for example "my children and grandchildren", and decide who receives what and when. No beneficiary has an automatic right to anything, which is what makes it discretionary.

You write a letter of wishes to guide the trustees. It is not binding, which is deliberate: if it were binding, the flexibility that justifies the structure would disappear.

When people use one

• Beneficiaries who are young, where handing over a large sum at 18 is not what you want.
• A beneficiary who is vulnerable, whether through disability, addiction, or a difficult relationship or business situation.
• Second marriages, where you want to provide for a spouse while making sure assets eventually reach children from an earlier relationship.
• Life policies, which are very commonly written into trust so they pay out promptly and outside the estate. This is the most widespread use by far and usually costs nothing extra to arrange at outset.
• Keeping options open where family circumstances may change in ways you cannot predict.

How they are taxed

This is where discretionary trusts get their reputation for complexity, and it is deserved. There are three points at which tax can arise.

Going in

Transferring assets into a discretionary trust during your lifetime is a chargeable lifetime transfer. Above your available nil rate band there is an immediate charge, at 20% if the trust pays it or effectively 25% if you do. Below the nil rate band there is no immediate charge, which is why gifts into trust are often sized with that in mind.

Every ten years

The trust faces a periodic charge on each ten-year anniversary, at a maximum of 6% of the value above the available nil rate band. The actual rate is usually lower, because the calculation takes account of the trust’s history and earlier gifts, so it needs working out for each trust.

Coming out

Distributions to beneficiaries can trigger an exit charge, calculated by reference to the last periodic charge and how long the assets have been in the trust.

Income and gains inside the trust are also taxed, generally at the higher trust rates, though there is a small standard rate band. Where a beneficiary pays a lower rate than the trust, income can sometimes be distributed and tax reclaimed by them.

How this compares to other trusts

A bare trust is much simpler. The beneficiary is fixed and absolutely entitled, and gains the right to the assets at 18 in England and Wales. Assets are treated as theirs for tax. Often used for grandchildren's savings. Simple, cheap, and no flexibility at all.

An interest in possession trust gives one beneficiary the right to income while capital is preserved for others. Common in second-marriage planning.

The trade-off across all three is the same: the more flexibility the trustees have, the heavier the tax and administrative treatment.

The case against

Discretionary trusts are sometimes sold as inheritance tax planning. For most families they are not primarily that, and treating them as a tax device usually disappoints. The periodic and exit charges exist precisely to stop assets sitting outside the estate indefinitely without any charge.

They also cost money to run. Trustees have real duties, there are tax returns to file, registration with HMRC's Trust Registration Service is required, and someone has to make decisions for potentially decades. For a modest sum, the cost and effort frequently outweigh the benefit.

Where they earn their keep is control and protection: a young or vulnerable beneficiary, a complicated family, or a policy that needs to pay out cleanly. Those are good reasons. Tax alone usually is not.

Where the line is

Drafting a trust deed and advising on the legal effect of a trust is work for a solicitor, and we do not do it. What we advise on is whether a trust is the right answer to the problem you actually have, how it fits the rest of your estate planning, and what it means for your inheritance tax position.

This page is general information about the rules and does not constitute advice.

Last reviewed: 17 September 2026. Next review: Annually.