What income tax rates apply to UK discretionary trusts in 2026/27?

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Discretionary trusts are a popular estate planning tool in the UK but face some of the highest tax rates in the system. Understanding these rates is essential for trustees and beneficiaries. Income tax -- the standard rate band All discretionary trusts share a single GBP 1,000 standard rate band (not per trust, but split among trusts created by the same settlor if there is more than one). Within this band: -- Non-savings income and savings income: 20% (basic rate) -- Dividend income: 8.75% (dividend ordinary rate) Above the GBP 1,000 standard rate band: -- Non-savings and savings income: 45% (the trust rate) -- Dividend income: 39.35% (the dividend trust rate) This means most trust income above GBP 1,000 is taxed at 45% or 39.35%, making trusts tax-inefficient for income accumulation. Distributions to beneficiaries When trustees distribute income to beneficiaries, they issue a tax credit voucher showing 45% tax paid (or 39.35% for dividends). The beneficiary receives the net amount. If the beneficiary is a basic-rate taxpayer, they can reclaim the difference between 45% and their own rate (20%), recovering 25p in every GBP 1 of trust income distributed. Higher-rate beneficiaries have no additional liability (already at 40% -- slightly below 45%, so there can be a small reclaim even at 40%). IHT -- entry, anniversary and exit charges Transfers into a discretionary trust are chargeable lifetime transfers (CLTs) for IHT purposes. The key charges are: -- Entry charge: 20% on the value entering the trust above the available NRB (GBP 325,000 in 2026/27) -- 10-year anniversary charge: up to 6% of the trust value above the NRB at each 10-year anniversary -- Exit charge (proportionate charge): a proportion of the previous anniversary rate, applied when assets leave the trust between anniversaries The effective maximum IHT rate inside a trust over time is much lower than the estate rate of 40%, making trusts useful for gradual wealth transfer despite the high income tax rates. Accumulation trusts vs bare trusts Bare trusts are different -- the beneficiary is absolutely entitled and the income is taxed as the beneficiary's own (not at trust rates). Accumulation and maintenance trusts have their own rules. Most family wealth protection arrangements use discretionary trusts precisely because the trustees retain discretion over who benefits and when. Trust registration All UK trusts with tax consequences (and some without) must register on HMRC's Trust Registration Service. Failure to register on time attracts a GBP 5,000 penalty.

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