Discreet · Secure
020 8064 1999 Book a Consultation
Fairchild Oldfield Fairchild Oldfield Estate Planning · Limited
Book a Consultation

Trusts

Discretionary Trusts Explained

How a discretionary trust works in England and Wales, who the trustees and beneficiaries are, and how it is taxed.

9 min read · Written by the Fairchild Oldfield team · Last reviewed: June 2026

6%
The maximum inheritance tax rate that can apply to a discretionary trust at each ten-year anniversary and when assets leave the trust. It is a maximum, and many trusts pay far less or nothing.
Source: gov.uk/guidance/trusts-and-inheritance-tax, as at June 2026, subject to change.

A discretionary trust is an arrangement where trustees hold assets for a group of potential beneficiaries and decide, at their discretion, who receives what and when. No single beneficiary has a fixed right to the income or capital, which gives the trustees flexibility over how the assets are used.

Discretionary trusts are one of the more common trust structures used in estate planning in England and Wales, often to provide for children, grandchildren or a vulnerable relative. This guide explains how they work, who is involved, and how they are taxed. It sits within our wider Trusts Explained: types and how they work guide and our estate planning guide. Figures are current as at June 2026 and are subject to change.

What is a discretionary trust?

A discretionary trust is a legal arrangement in which the trustees can make decisions about how to use the trust income, and sometimes the capital, rather than paying it to fixed beneficiaries in fixed shares (gov.uk, types of trust, as at June 2026). The people who might benefit are named as a class, but none of them has an automatic entitlement. The trustees decide what is paid out, to whom, how often, and on what conditions.

Who is involved in a discretionary trust?

Three roles sit at the centre of any discretionary trust: the settlor who creates it and puts assets in, the trustees who hold and manage those assets under a legal duty, and the beneficiaries who might receive something. In a discretionary trust the beneficiaries are usually a defined group rather than named individuals with fixed shares, and the trustees choose between them.

  • Settlor. The person who sets up the trust and transfers assets into it, either during life or through a will.
  • Trustees. The people, or a professional trustee, who legally own and manage the assets and exercise the discretion. They owe legal duties to the beneficiaries.
  • Beneficiaries. The class of people who could benefit, such as children and grandchildren, present and future.
  • Letter of wishes. A non-binding note from the settlor guiding how the trustees might use their discretion.

How does a discretionary trust work?

Once assets are transferred in, the trustees become their legal owners and manage them for the class of beneficiaries. Because no beneficiary has a fixed entitlement, the trustees decide who receives income or capital, how much, and when, guided by the trust deed and any letter of wishes. This flexibility is the defining feature: the trustees can respond to circumstances as they change over years or decades.

A fixed trust says who gets what. A discretionary trust hands the trustees the power to decide, within the settlor's wishes, as life unfolds.

Common uses

Why people use a discretionary trust

Not every family needs one. The flexibility suits particular situations more than others.

Providing for children

Trustees can hold assets for young or future children and release them as needs arise, rather than at a fixed age.

Vulnerable beneficiaries

Where a beneficiary cannot manage money, or where a direct gift could affect means-tested support, discretion can help.

Keeping options open

When the settlor cannot predict who will need what, discretion lets trustees adapt to circumstances over time.

Blended families

They can help provide for a current partner while keeping capital available for children from an earlier relationship.

The numbers

How discretionary trusts are taxed

Discretionary trusts sit under the "relevant property" regime, so they carry their own tax charges that a simple gift does not. Transfers in above the available nil-rate band can attract an entry charge, there are periodic charges every ten years, and charges when assets leave. Income and capital gains within the trust are taxed at trust rates. The figures below are current as at June 2026 and subject to change.

Charge or rateLevel (June 2026)
Entry charge (trustees pay), on value above the nil-rate band20%
Ten-year anniversary charge (maximum)6%
Exit charge when assets leave (maximum)6%
Trust income tax, non-dividend income45%
Trust income tax, dividend income39.35%

Sources: gov.uk, trusts and inheritance tax and gov.uk, trusts and income tax, as at June 2026, subject to change.

The tax credit

45%

A discretionary income payment reaches a beneficiary as though tax has already been paid at 45%. A non-taxpayer or a basic or higher-rate taxpayer may be able to reclaim some of it (gov.uk, as at June 2026, subject to change).

A worked example (illustration only). Suppose a settlor places £325,000 into a discretionary trust during their lifetime, an amount within the standard nil-rate band of £325,000 (gov.uk, as at June 2026, subject to change). Because the transfer does not exceed the available nil-rate band, no 20% entry charge arises on the way in. Ten years later the trustees face a periodic review, and any inheritance tax charge is calculated at up to a maximum of 6% of the value above the nil-rate band at that point. If the trust value has stayed within the band, the periodic charge can be nil. Every trust is different, the nil-rate band is frozen until the end of the 2030-31 tax year (5 April 2031) (gov.uk), and the calculations are involved, so this is general information rather than a calculation for any individual.

Drawbacks and things to weigh up

The flexibility of a discretionary trust comes with cost and complexity. There are ongoing trustee duties, tax returns and record-keeping, and the periodic and exit charges under the relevant property regime. Income retained in the trust is taxed at the trust rates of 45% on most income and 39.35% on dividends (gov.uk, as at June 2026, subject to change), which can be higher than the beneficiaries' own rates. An unsuitable trust can cost more than it achieves.

  • Administration. Trustees must keep accounts, register the trust and, where due, file tax returns.
  • Trust rates. Income kept in the trust is often taxed at higher rates than an individual would pay.
  • Periodic and exit charges. Inheritance tax can apply every ten years and when assets leave, up to a maximum of 6%.
  • No guarantees. A discretionary trust cannot guarantee a particular tax result, and the rules change.

Setting up a discretionary trust

A discretionary trust is created either by a trust deed during the settlor's lifetime or by a will, so that it takes effect on death. Choosing trustees, defining the class of beneficiaries and writing a clear letter of wishes are central steps. Because the tax and administrative consequences can be significant, many people choose to take advice before setting one up rather than relying on a template. Our guide on how to set up a trust (and costs) covers the practical steps and typical fees.

From idea to trust

The main steps in practice

I

Decide the aim

Clarify who might benefit and what the trust is meant to achieve.

II

Choose trustees

Appoint people, or a professional trustee, who can act responsibly over time.

III

Draft and fund

Prepare the trust deed or will trust and transfer assets in, with tax checked first.

IV

Register and review

Register the trust where required and revisit it as rules and circumstances change.

Discretionary trusts in Scotland and Northern Ireland

This guide describes the law of England and Wales. Discretionary trusts exist across the UK and the inheritance tax rules are UK-wide, but the surrounding law differs. Scotland has its own trust and succession law, including legal rights that can entitle a spouse and children to a fixed share of an estate, which can interact with how a trust is used. Northern Ireland follows a separate but broadly similar system to England and Wales. Where an estate touches more than one jurisdiction, it can be worth taking advice in each.

Frequently asked questions

What is a discretionary trust in simple terms?

It is a trust where the trustees hold assets for a group of potential beneficiaries and decide who receives what, and when, rather than paying fixed shares. No beneficiary has an automatic right to the income or capital. In England and Wales this flexibility makes discretionary trusts common where the future needs of a family are uncertain.

How is a discretionary trust taxed in the UK?

Discretionary trusts fall under the relevant property regime. Transfers in above the nil-rate band can face a 20% entry charge, there are charges of up to 6% every ten years and when assets leave, and income is taxed at trust rates of 45%, or 39.35% on dividends (gov.uk, as at June 2026, subject to change). The figures can change.

Who controls a discretionary trust?

The trustees control it. They legally own and manage the assets and exercise the discretion over payments, subject to the trust deed and their legal duties to the beneficiaries. A settlor can guide them through a non-binding letter of wishes, but cannot force a particular decision. Choosing trustees who can act responsibly over many years matters a great deal.

Can a discretionary trust reduce inheritance tax?

It may form part of a wider inheritance tax approach in some circumstances, but it is not a guaranteed saving and carries its own charges under the relevant property regime. Whether it helps depends on the assets, the amounts and the family. Because the rules are involved, this is generally discussed with a qualified professional who can consider the full position.

What is a letter of wishes?

A letter of wishes is a private, non-binding note from the settlor to the trustees, explaining how they would like the discretion used. It does not have legal force, so the trustees are not bound by it, but it is a helpful guide. Many people update it over time as their family and priorities change.

Do I need a solicitor to set up a discretionary trust?

Not always, though many people choose professional help. Trust deeds, tax charges and trustee duties are technical, and mistakes can be costly. A solicitor, a STEP practitioner or an FCA-authorised financial adviser can consider whether a discretionary trust suits the circumstances before anything is drafted. Templates rarely account for individual tax positions.

About Fairchild Oldfield

The Fairchild Oldfield team brings together estate planning, tax, independent financial advice and client care, working with families across England and Wales.

Fairchild Oldfield are estate planning specialists and will writers, not a firm of solicitors. This article is general information based on practical experience, not legal, tax or financial advice.

Important: This article is general information only and is not legal, tax or financial advice. Reading it does not create a professional relationship. It is based on the law of England and Wales, and other UK jurisdictions may differ. Figures and rules are current as at June 2026 and are subject to change. Before acting, many people choose to seek advice from a suitably qualified professional, such as a solicitor, a STEP practitioner, an accountant, or an FCA-authorised financial adviser, who can consider your individual circumstances.

Considering a trust for your family?

Wills, trusts and tax, considered together with one point of contact.

Book a Free Consultation