What is the tax difference between a bare trust and a discretionary trust?

Full answer

The key distinction is who is treated as the owner for tax. In a bare trust the named beneficiary has an absolute right to the assets and income, so for Income Tax and Capital Gains Tax the beneficiary is taxed as if they held the assets personally. They use their own Personal Allowance (GBP 12,570), their own Capital Gains Tax Annual Exempt Amount (GBP 3,000 for 2026/27), their own savings and dividend allowances (GBP 500 dividend allowance), and their own rates. This makes bare trusts simple and often tax-efficient, which is why they are common for gifts to children -- though the parental settlement rules can tax income back on a parent if a parent funded the trust and the income exceeds GBP 100 a year. A discretionary trust is a separate taxable entity. Trustees decide who benefits and when, so no beneficiary is treated as owner. The trust pays Income Tax at the trust rates (the higher trust rates apply above a small standard-rate band) and Capital Gains Tax at the higher CGT rate of 24%, with only half the individual annual exempt amount available to trustees. The specific trust Income Tax rates and the standard-rate band are not in this rate card, so confirm them on gov.uk. Discretionary trusts also sit within the relevant property regime for Inheritance Tax: there can be a 20% lifetime entry charge on amounts above the available nil-rate band (GBP 325,000), a periodic charge of up to 6% every 10 years, and exit charges when capital leaves. When trustees distribute income to a beneficiary it carries a 45% tax credit which the beneficiary may reclaim if they are a lower-rate taxpayer. Use the capital gains tax and inheritance tax calculators to model the figures.

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