What are discretionary trusts?

How a discretionary trust works

In a discretionary trust, no beneficiary has a fixed right to the income or capital. Instead, GOV.UK explains that the trustees can decide how to use the trust’s income and capital. They might choose:

• which beneficiaries receive payments
• how often payments are made
• how much each beneficiary gets
• any conditions to attach

The trust document names the beneficiaries, or describes a group of them, such as “my children and grandchildren”. The person who sets up the trust (the settlor) often writes a non-binding “letter of wishes” to guide the trustees.

For a wider introduction, see our guide explaining trusts in plain English.

Why might someone consider one?

People sometimes look at discretionary trusts where flexibility matters. Examples include:

• a family where it is not yet clear who will need help most
• a beneficiary who may struggle to manage money
• a beneficiary who receives, or may need, means-tested benefits or care support
• concerns about a beneficiary’s divorce, debts or circumstances changing in future

Whether a discretionary trust is right depends on personal circumstances. It is not suitable for everyone, and other options may work better. That is a question for a qualified adviser.

A practical example

A father leaves part of his estate on a discretionary trust for his three adult children and any grandchildren. One child is self-employed with an irregular income. Another has a disability. The trustees can respond to each person’s needs as they change, perhaps paying for a grandchild’s course one year and helping with care costs another. The father’s letter of wishes explains what he hoped for, but the trustees make the final decisions.

Responsibilities for the trustees

Because trustees have wide powers, they also carry real responsibility. They must make decisions fairly, consider all the beneficiaries, keep records and deal with tax. A trustee must act fairly between beneficiaries.

How discretionary trusts are taxed

Discretionary trusts are taxed differently from many other trusts. At the time of writing (October 2026), the main points from GOV.UK are as follows.

Income Tax

GOV.UK lists a trust rate of 45% on most income and 39.35% on dividend income for discretionary trusts. Most trusts do not pay Income Tax on income up to a small tax-free amount, normally £500. Trustees do not get the dividend allowance. Beneficiaries who receive income may be able to reclaim some tax, depending on their own position.

Capital Gains Tax

Trustees have a Capital Gains Tax tax-free allowance, which GOV.UK shows as £1,500 for most trusts for the 2026 to 2027 tax year, or £3,000 where there is a vulnerable beneficiary.

Inheritance Tax

Discretionary trusts usually fall under the “relevant property” rules. According to GOV.UK, this can mean Inheritance Tax:

• when assets go into the trust during the settlor’s lifetime, if they exceed the available threshold
• at each ten-year anniversary of the trust
• when assets leave the trust (an “exit charge”), at up to a maximum of 6%

The calculations can be complex. Our article on trust taxation gives an overview of each tax.

Registration with HMRC

Most UK express trusts, including many discretionary trusts, need to be registered on HMRC’s Trust Registration Service, even if they pay no tax. Some trusts are excluded, such as certain Will trusts closed within two years of death. See when a trust needs registering.

Things to think about

• Control: once assets are in the trust, the settlor usually cannot take them back.
• Choice of trustees: they will make real decisions, so trust and ability matter.
• Running costs: there may be ongoing tax returns, accounts and professional fees.
• Time scale: trusts can last many years, so the documents need to be clear.

When to get professional help

Discretionary trusts involve legal drafting and tax rules that can have lasting effects. It is usually sensible to speak to a solicitor, a STEP member or another appropriately qualified adviser if you are considering one, if you have been named as a trustee, or if you are a beneficiary with questions about your position. A professional can explain the options without assuming a trust is the answer.

Next steps

If you would like to talk this through with someone qualified, you can read more about how we can help with trusts, or answer a few short questions in our trusts questionnaire. WillHarbour is an introduction service, not a law firm. With your permission, we share your enquiry with up to three suitable firms, which will explain their own fees and their referral arrangement with us before you decide anything.