How to Set Up a Discretionary Trust (2026 UK Guide)

To set up a discretionary trust in England and Wales, you appoint trustees, define a class of beneficiaries, have a trust deed drafted, transfer assets into the trust, and register it with HMRC within 90 days. A discretionary trust lets your chosen trustees decide who benefits, and when, from the assets you place in their care.

Most guides stop at the deed. The parts that catch families out come later: the Trust Registration Service deadline, and three separate inheritance tax charges that apply while the trust runs. This guide covers the full process and those ongoing points. Figures are current as at August 2026 and are subject to change.

What is a discretionary trust?

A discretionary trust is a legal arrangement where trustees hold assets for a group of potential beneficiaries and decide, at their discretion, who receives what and when. No beneficiary has an automatic right to the money or property. Instead they have the possibility of benefiting, and the trustees weigh that up. This flexibility is the main reason families choose it over a fixed trust.

It is often used to provide for children or grandchildren whose needs are not yet clear, to hold assets for a vulnerable relative, or as part of wider inheritance tax planning. A trust in England and Wales can last up to 125 years (Perpetuities and Accumulations Act 2009, as at August 2026).

How do you set up a discretionary trust?

Setting up a discretionary trust follows six steps: decide its purpose, choose trustees, define the beneficiaries, have the deed drafted, transfer assets in, and register with HMRC. The order matters, because the deed pulls the earlier decisions together and the registration duty starts once assets are in.

Decide what the trust is for, and what will go into it. Be clear on the purpose (providing for children, protecting a vulnerable relative, holding a specific asset) and list the money, property or investments you intend to place in it. This shapes every later decision.
Choose your trustees. Appoint people or a professional you trust to manage the assets. Two to four trustees is usual. They take legal ownership and must act in the beneficiaries' interests, so pick carefully.
Define the class of beneficiaries. Set out who can potentially benefit, for example "my children and grandchildren". The group must be clear enough for the trustees to identify who is in it, but it does not name fixed shares.
Have the trust deed drafted. The deed records the trustees, the beneficiary class, the trustees' powers, and how the trust operates. This is a technical legal document, and errors are expensive to unpick, so it is usually drafted with professional input.
Transfer the assets in (fund the trust). The trust only works once it holds something. You move cash, investments or property into the trustees' names. An empty trust has nothing to distribute.
Register with HMRC. Most discretionary trusts must be registered on the Trust Registration Service within 90 days of being set up (gov.uk, as at August 2026). See the registration section below.

A separate letter of wishes usually sits alongside the deed to guide the trustees. It is covered further down, because it does real work in practice even though it carries no legal force.

Lifetime trust or will trust: which route?

You can create a discretionary trust in two ways: during your lifetime (a lifetime settlement) or through your will, so it comes into being on your death (a will trust). The choice changes when the trust starts, how it is taxed on the way in, and how much control you keep. The table sets out the practical differences.

Feature	Lifetime trust	Will trust
When it starts	Straight away, while you are alive	On your death, through your will
Entry tax charge	20% on value above your available nil-rate band, if the transfer exceeds it	Forms part of the death estate; charged with the rest of the estate
Control during life	You give up ownership of the assets now	You keep your assets until death
Can it be changed	Hard to reverse once made	You can rewrite your will at any time before death
Common use	Gifting assets away early, some care and tax planning	Providing for a spouse then children, or for young or vulnerable beneficiaries

Tax treatment based on gov.uk/trusts-taxes, as at August 2026, subject to change. Which route suits you depends on your assets and goals.

Who can be a trustee, and who can be a beneficiary?

A trustee can be almost any adult of sound mind, including you as the settlor, a family member, or a professional such as a solicitor or accountant. Beneficiaries are the group you name to potentially benefit, and they hold no fixed entitlement. The two roles are separate, and choosing the right trustees matters more than most people expect.

Number of trustees. Two to four is standard. You need at least two to deal with land, and appointing more than one guards against a single point of failure.
Can you be a trustee? Yes. Settlors often act as a trustee alongside others. You cannot, though, keep so much benefit for yourself that HMRC treats the assets as still yours.
Trustee duties. Trustees must act in the beneficiaries' interests, invest with reasonable care, keep accounts, and avoid conflicts. These duties are ongoing, not one-off.
The beneficiary class. This can be wide (for example all descendants) or narrow. Naming a class, rather than fixed shares, is what gives the trust its discretion.

What is a letter of wishes?

A letter of wishes is a private note from you to your trustees explaining how you would like them to use their discretion. It is not legally binding, so the trustees can depart from it, but in practice it is the main guide they follow. It sits alongside the trust deed and can be updated without a lawyer.

Because a discretionary trust deliberately gives trustees freedom, the letter is where your intentions actually live. It might explain that a child should not receive capital until they are settled, or that one grandchild has greater needs. Keeping it current, and revisiting it after family changes, tends to prevent disputes later.

Do you have to register the trust with HMRC?

Yes, most discretionary trusts must be registered on HMRC's Trust Registration Service, usually within 90 days of being created, and again within 90 days of any later change to the trust or its beneficial owners (gov.uk, as at August 2026). Registration is a legal duty on the trustees, not an optional extra, and it is often the step families forget.

HMRC does not usually penalise a genuine first, non-deliberate mistake, and often issues a warning letter first. Where a failure to register is deliberate or repeated, a penalty of up to £5,000 per trust may apply (HMRC Trust Registration Service Manual, as at August 2026, subject to change). The register also has to be kept up to date once made.

What people underestimate. The 90-day clock, the duty to update after every change (a new trustee, a beneficiary's changed details), and the three tax charges below are ongoing obligations. A discretionary trust is not a document you sign once and file away. It is a structure that needs administering for as long as it runs, which is why some families use a professional trustee.

How is a discretionary trust taxed?

A discretionary trust faces three inheritance tax points (entry, ten-year, and exit charges) plus income tax and capital gains tax at trust rates. None of these is usually as large as families fear, but together they are the running cost of the structure. The table sets out the current headline figures.

Charge	When it applies	Rate (Aug 2026)
Entry charge	On setting up a lifetime trust, on value above your available nil-rate band	20%
Ten-year (periodic) charge	Every 10-year anniversary, on value above the nil-rate band	Up to 6% (an effective rate, often lower)
Exit charge	When assets leave the trust between anniversaries	A proportion of the 10-year rate
Income tax	On income the trust receives	45% (39.35% on dividends)
Capital gains tax	On gains when trust assets are sold	24% (all assets)

Sources: gov.uk/trusts-taxes. Trust income within a £500 de-minimis amount is not taxed (from 6 April 2024, replacing the former £1,000 standard-rate band). The nil-rate band is £325,000, frozen until 5 April 2031 (gov.uk, as at August 2026, subject to change).

A worked example (illustration only). Suppose you settle £400,000 of investments into a lifetime discretionary trust and have your full £325,000 nil-rate band available. The entry charge applies to the £75,000 above the band at 20%, which is £15,000. At the first ten-year anniversary, a periodic charge of up to 6% applies to the value above the nil-rate band at that date. Every trust is different, the calculations are detailed, and the figures change, so this is general information rather than advice for your situation.

Two wider changes may affect your plan. From 6 April 2026, agricultural and business property relief gives 100% relief on the first £2,500,000 of qualifying assets per person and 50% above that (gov.uk, announced 23 December 2025). From 6 April 2027, most unused pension funds fall within inheritance tax. Both can affect whether a trust still suits your plan, so a review may be worth it.

Frequently asked questions

How much does it cost to set up a discretionary trust?

Costs vary with complexity, from a straightforward lifetime trust to detailed tax and trustee arrangements. Many firms set out fees before any work begins, and a single fixed figure is rarely meaningful without knowing your assets and goals. It can be worth asking for clear, agreed fees in writing and checking what ongoing administration is included.

Can I be a trustee of my own discretionary trust?

Yes. Settlors often act as a trustee alongside one or more others, which is common and generally accepted. You should avoid keeping so much benefit for yourself that HMRC treats the assets as still part of your estate. Appointing at least one other trustee also helps with continuity and dealing with property.

Do you have to register a discretionary trust with HMRC?

Most discretionary trusts must be registered on HMRC's Trust Registration Service, usually within 90 days of being created, and updated within 90 days of any change. Registration is a duty on the trustees. Deliberate or repeated failure to register can lead to a penalty of up to £5,000 per trust, though HMRC often issues a warning first (gov.uk, as at August 2026, subject to change).

Who pays the tax on a discretionary trust?

The trustees are responsible for the trust's tax, including any inheritance tax charges, income tax and capital gains tax at trust rates. When income is paid out, a beneficiary may reclaim tax if their own rate is lower, or pay more if it is higher. The detail depends on the trust and the beneficiary, so trustees often take advice.

What are the disadvantages of a discretionary trust?

The main drawbacks are cost and ongoing administration, the three inheritance tax charges, higher trust rates of income and capital gains tax, and the registration and record-keeping duties. Once set up, a lifetime trust is also hard to reverse. For some families the flexibility and control outweigh these, but it is a decision to weigh carefully.

Can a discretionary trust be changed or ended?

It depends on the deed. Trustees usually have powers to distribute assets and, in many cases, to bring the trust to an end early, which can trigger an exit charge. Some deeds allow trustees or a named person to vary certain terms. A lifetime trust cannot simply be undone by the settlor, so the terms need to be right from the start.

About Fairchild Oldfield

The Fairchild Oldfield team brings together estate planning, tax and client care, working with families across England and Wales on wills, trusts and inheritance tax planning.

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 August 2026 and are subject to change. Setting up a trust has lasting tax and legal effects, so 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.

How to Set Up a Discretionary Trust in England and Wales