Discretionary trusts explained
A discretionary trust gives trustees complete freedom over who benefits and when. That flexibility is genuinely valuable — and it is taxed accordingly.
The short answer
- Trustees choose who benefits, when and how much, from a class of potential beneficiaries. Nobody has a fixed entitlement.
- Best for vulnerable, unpredictable or not-yet-born beneficiaries — and for keeping assets away from a beneficiary's divorce or creditors.
- Taxed under the relevant property regime: up to 20% entering, up to 6% every ten years, plus exit charges.
- Income is taxed at the highest rates, and trustees get a reduced capital gains allowance.
- Always pair one with a detailed letter of wishes — it is what trustees actually work from.
What's on this page
How it works#
You name a class of potential beneficiaries — "my children and grandchildren, born and unborn" — rather than fixed shares. Trustees then decide who receives what, when, and whether at all. A beneficiary has only a hope of benefit, not a right to it.
That absence of entitlement is the entire point. Because nobody owns the assets, they are not counted in a beneficiary's means test, divorce settlement or bankruptcy.
When it genuinely earns its keep#
- A beneficiary on means-tested benefits. A direct inheritance can remove entitlement; a discretionary trust does not. For a disabled beneficiary, a disabled person's trust may be better still, with more favourable tax treatment.
- A beneficiary who is vulnerable — addiction, financial difficulty, susceptibility to pressure.
- A beneficiary going through, or likely to go through, a divorce.
- Future generations. Grandchildren not yet born can be included in the class.
- Uncertainty. You cannot know in 2026 what your family will look like in 2046. Trustees can.
- Business owners who want flexibility over which children take what.
The tax cost — stated plainly#
- Entry charge: putting more than the available nil-rate band into a lifetime discretionary trust triggers an immediate charge of up to 20% on the excess.
- Ten-yearly (periodic) charge: up to 6% on the value above the available nil-rate band, on every tenth anniversary.
- Exit charge: a proportionate charge when assets leave the trust.
- Income tax: trust income is taxed at the highest rates, with a small standard-rate band.
- Capital gains: trustees get a reduced annual exempt amount.
These charges are the price of the flexibility. They are not a reason never to use a discretionary trust — but any adviser who does not mention them is not giving you the full picture.
Nil-rate band discretionary trusts#
Historically common in wills: leave the nil-rate band into a discretionary trust and the rest to the spouse. The transferable nil-rate band made this largely redundant for tax purposes, and it can complicate the £175,000 residence allowance.
If your will still contains one from before the transferable band existed, it is worth having reviewed. It may still be doing useful non-tax work — or it may just be adding cost.
The letter of wishes#
Because trustees are exercising real judgement, they need to know what you actually wanted. A letter of wishes sits alongside the trust — not legally binding, not public — and explains:
- who you regard as the primary beneficiaries;
- what circumstances should trigger a distribution, and what should not;
- anything sensitive trustees should know but that you do not want in a public document;
- how you would like the trust wound up eventually.
Update it as circumstances change. It costs nothing and it is the document trustees will actually reach for.
Choosing trustees#
More important here than for any other trust type, because they hold genuine discretion. Look for people who are impartial between beneficiaries, willing to take advice, organised enough to keep accounts and meet HMRC registration and reporting obligations, and likely to be around for the trust's life. Appoint at least two, plus replacements, and consider a professional alongside family members — noting that professional trustees charge.
Want this checked for your own situation?
A regulated adviser can tell you in one conversation whether this applies to you. We can introduce you free of charge.
Free introduction · Regulated advisers only · We may be paid a referral fee, which never affects our guidance.
Frequently asked questions
Do beneficiaries have any rights in a discretionary trust?
Limited ones. They have no right to any specific sum, but they can generally ask to see the trust deed and accounts, and they can challenge trustees who act improperly or fail to consider exercising their discretion at all. What they cannot do is demand a payment.
How much tax does a discretionary trust pay?
Potentially an entry charge of up to 20% above the nil-rate band, a ten-yearly charge of up to 6% on the excess above the available band, and proportionate exit charges. Income is taxed at the top rates. The actual figures depend on values and timing, so get them modelled before setting one up.
Can I be a beneficiary of my own discretionary trust?
Usually a bad idea. If you can still benefit from assets you gave away, the gift with reservation of benefit rules generally keep them in your estate for inheritance tax — defeating the purpose. It also strengthens any deliberate deprivation argument for care fees.
Does a discretionary trust have to be registered?
Yes, in almost all cases, with HMRC's Trust Registration Service — whether or not it pays tax. The register must be kept current and penalties apply for failing to register. It is one of the ongoing obligations trustees take on.
This is general information, not legal advice. Everyone's situation is different — speak to a qualified adviser before acting. KeepTheLot is an independent information service covering England & Wales. We are not a law firm.
Part of our guide to trusts.