To set up a discretionary trust in England and Wales you decide what the trust is for and which assets it will hold, choose your trustees and the class of people who could benefit, and have a solicitor or trust specialist draft a trust deed that you sign, date and fund. You then register a taxable trust with HMRC's Trust Registration Service, generally within 90 days (gov.uk, as at August 2026, subject to change).
A discretionary trust can be created during your lifetime, by a stand-alone deed, or on death through your will. Because it carries its own tax rules and ongoing duties, this guide walks through each step and where it tends to be worth taking advice. It is general information about the law of England and Wales, not advice for any particular estate, and every figure is dated and subject to change.
What is a discretionary trust?
A discretionary trust is an arrangement in which 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 is the feature that separates it from a bare or interest-in-possession trust. That flexibility is why it is often used to provide for children, grandchildren, or a relative who cannot manage money directly. In tax terms it is a "relevant property" trust, which brings its own inheritance tax treatment (gov.uk, as at August 2026, subject to change).
How to set up a discretionary trust, step by step
The mechanics are reasonably consistent from one trust to the next. The judgement lies in the drafting and the tax position, which is where a qualified adviser usually adds the most value.
| Step | What it involves |
|---|---|
| 1. Set the purpose | Decide why the trust exists, who it is meant to help, and which assets (cash, investments, property, a life policy) it will hold. |
| 2. Choose trustees | Appoint people you trust to make decisions, commonly two to four. Trustees can include family members, a professional, or both. |
| 3. Define the beneficiaries | Name the class of people who could benefit, for example your children and their descendants, rather than fixed shares. |
| 4. Draft the trust deed | A solicitor or trust specialist prepares the deed setting out the trustees' powers, the beneficiaries and the terms. |
| 5. Sign and fund it | The settlor and trustees sign and date the deed, and assets are legally transferred into the trust. |
| 6. Register with HMRC | Register a taxable trust with the Trust Registration Service, generally within 90 days (gov.uk, subject to change). |
| 7. Keep it running | Trustees keep records and accounts, meet tax and reporting duties, and record decisions, including a letter of wishes. |
A trust created by your will works to the same logic, but the deed is a clause in the will and the trust only comes into being on death. If you are drafting a will at the same time, it can help to consider the two together rather than in isolation, as covered in our guide on how to write a will.
The people involved
Three roles sit at the centre of every discretionary trust, and understanding them makes the paperwork much clearer.
- The settlor. The person who creates the trust and puts assets into it. There can be more than one.
- The trustees. The legal owners of the trust assets, who manage them and exercise the discretion. They carry legal duties and are personally responsible for getting it right.
- The beneficiaries. The class of people who could receive income or capital, at the trustees' discretion, with no fixed entitlement.
Alongside the deed, settlors usually leave a letter of wishes. This is a private, non-binding note that guides the trustees on how the settlor would like the discretion exercised. It carries no legal force, which is deliberate, because it keeps the flexibility that defines the trust.
Tax and registration
Discretionary trusts sit within the relevant property regime, so they can face inheritance tax charges when assets go in, at each ten-year anniversary, and when assets leave. These are separate from the tax on your own estate.
| Inheritance tax charge | When it can apply | Rate |
|---|---|---|
| Entry charge | On assets placed into the trust in your lifetime above the available nil-rate band | 20% |
| Ten-yearly (principal) charge | On each tenth anniversary of the trust | Up to 6% of value above the nil-rate band |
| Exit charge | When assets leave the trust between anniversaries | A proportion of the ten-yearly rate |
Sources: lifetime rate of 20% per gov.uk; the ten-yearly charge is capped at an effective 6% (HMRC Inheritance Tax Manual). The nil-rate band is £325,000 and is frozen until 5 April 2031 (gov.uk). All as at August 2026, subject to change.
The trust also pays income tax in its own right. Above a small standard rate band, currently £500, trustees of a discretionary trust pay tax at the trust rate.
| Trust income above the £500 standard rate band | Rate |
|---|---|
| Dividend income | 39.35% |
| All other income | 45% |
Source: gov.uk/trusts-taxes, as at August 2026, subject to change.
Registration is a legal duty, not an optional extra. A taxable trust must be registered with HMRC's Trust Registration Service, generally within 90 days of being created or becoming liable to tax (gov.uk, as at August 2026, subject to change). Because the charges interact with the wider estate, it can help to read this alongside our overview of inheritance tax.
When a discretionary trust is used
The flexibility of a discretionary trust suits situations where fixed gifts would be too blunt. Common reasons families consider one include providing for young or vulnerable beneficiaries, keeping assets outside a beneficiary's own estate for their own planning, protecting an inheritance where a relationship may break down, and holding a share of the family home. Some families also use trusts as part of planning for, limiting or mitigating the impact of care fees, an area with its own rules and anti-avoidance considerations that we cover in our guide to care home fees. A discretionary trust is one tool among several, and it is not the right answer for every estate.
Pitfalls to weigh up before you start
- The ongoing charges. The ten-yearly and exit charges, and the trust income tax rates above, mean a trust is a long-term commitment rather than a one-off.
- The administration. Trustees must keep accounts, register the trust, and file returns where tax is due. The duties do not end once the deed is signed.
- Deprivation of assets. Moving assets into a trust mainly to avoid care fees can be challenged by a local authority as deliberate deprivation, so timing and motive matter.
- Choosing the wrong trustees. Trustees hold real legal responsibility, so the choice deserves as much thought as the assets themselves.
Discretionary trusts in Scotland and Northern Ireland
This guide describes the law of England and Wales. Scotland has its own body of trust and succession law, including legal rights that can give a spouse and children a fixed share of an estate, which can affect how a trust is structured. Northern Ireland operates a separate but broadly similar system to England and Wales. The inheritance tax rules are set by HMRC and apply across the United Kingdom, but the trust law around them differs, so cross-border estates may need advice in each jurisdiction.
- Register a taxable trust with HMRC generally within 90 days (gov.uk).
- Lifetime entry charge on value above the nil-rate band: 20% (gov.uk).
- Ten-yearly charge: up to an effective 6% of value above the nil-rate band (HMRC manual).
- Trust income tax above the £500 standard rate band: 45%, or 39.35% on dividends (gov.uk).
- Nil-rate band: £325,000, frozen until 5 April 2031 (gov.uk).
Frequently asked questions
How do you set up a discretionary trust?
You decide the purpose and the assets, choose your trustees and the class of beneficiaries, and have a solicitor or trust specialist draft a trust deed that the settlor and trustees sign, date and fund. A taxable trust is then registered with HMRC's Trust Registration Service, generally within 90 days (gov.uk, as at August 2026, subject to change). It can be created in your lifetime or through your will.
How much does it cost to set up a discretionary trust?
Costs vary widely with the complexity of the deed, the assets involved and whether tax advice is needed, so a single figure is rarely meaningful without knowing the circumstances. Registering the trust with HMRC's Trust Registration Service is free (gov.uk, as at August 2026, subject to change). It can help to ask for clear, agreed fees in writing and to compare what is included before proceeding.
Can I set up a discretionary trust myself?
It is possible to create a trust without a professional, but discretionary trusts carry technical drafting and tax consequences that are easy to get wrong. Because the trustees take on legal duties and the charges can be significant, many people choose to involve a solicitor, a STEP practitioner or a qualified adviser rather than rely on a template. This is general information rather than a recommendation for any particular situation.
How is a discretionary trust taxed?
As a relevant property trust it can face inheritance tax of 20% on assets placed in above the nil-rate band, an effective charge of up to 6% at each ten-year anniversary, and exit charges when assets leave (gov.uk; HMRC manual). It also pays income tax at 45%, or 39.35% on dividends, above a £500 standard rate band (gov.uk). All as at August 2026, subject to change.
Do I have to register a discretionary trust with HMRC?
A taxable trust must be registered with HMRC's Trust Registration Service, and many non-taxable trusts must register too. The general deadline for a new taxable trust is within 90 days of it being created or becoming liable to tax (gov.uk, as at August 2026, subject to change). Trustees are responsible for registering and for keeping the details up to date.
What is the difference between a discretionary trust and a bare trust?
In a discretionary trust the trustees decide who benefits and when, and no beneficiary has a fixed entitlement. In a bare trust a named beneficiary is absolutely entitled to the assets and income, and can call for them at 18 in England and Wales. The discretionary version gives more flexibility and control, while the bare version is simpler but far more rigid. The right choice depends on the circumstances.