Discretionary Trust Income Tax UK 2026/27: 45% Trust Rate

Why Discretionary Trusts Face Different Tax Rates

Discretionary trusts occupy a distinct place in UK tax law because the trustees -- not the beneficiaries -- control who receives income and when. This discretion means HMRC cannot tax the income in the hands of a specific beneficiary as it arises, so instead the trustees pay tax at special trust rates that are deliberately set higher than normal individual rates.

The rationale is straightforward: if trust income were taxed at basic-rate, a settlor could place income-producing assets in a discretionary trust, keep the income retained in the trust indefinitely, and effectively avoid higher-rate tax that they would have paid had they held the assets personally. The 45% trust rate removes most of that incentive.

For 2026/27 the rules are unchanged from prior years. Trustees of a discretionary trust pay income tax on all trust income as it arises, using a two-tier rate structure.

The Standard Rate Band and Trust Tax Rates

Every discretionary trust receives a standard rate band of GBP 1,000 per tax year. This band is shared between related trusts set up by the same settlor -- if a settlor has created three discretionary trusts, each trust's share of the band is reduced to GBP 333, and in practice the band becomes negligible for multiple trusts.

Within the GBP 1,000 standard rate band, income is taxed as follows:

Non-savings income and savings income within the band: 20% (basic rate). Dividend income within the band: 8.75% (basic dividend rate).

Above the GBP 1,000 band the trust rate applies. Non-savings income and savings income above the band: 45% (trust rate). Dividend income above the band: 39.35% (dividend trust rate).

To put this in context: if a discretionary trust receives GBP 10,000 of rental income in 2026/27, the first GBP 1,000 is taxed at 20% (GBP 200) and the remaining GBP 9,000 at 45% (GBP 4,050), giving a total income tax bill of GBP 4,250. The same income in an individual's hands at the basic rate would cost GBP 2,000. The trust rate premium exists specifically to prevent income sheltering through trusts.

The Tax Pool Mechanism

The tax pool is one of the most technically complex aspects of discretionary trust administration, and it is where many trustees -- particularly those without professional advisers -- encounter problems.

The pool accumulates every year by adding the income tax actually paid by the trustees on trust income at the trust rate. The pool is reduced each time the trustees make a distribution to a beneficiary, because every distribution carries a 45% tax credit that is treated as having been deducted from the payment.

The mechanics work as follows. If trustees want to pay a beneficiary GBP 550, the payment is grossed up to GBP 1,000 (GBP 550 / 0.55). The trust is treated as having paid GBP 450 in income tax on that GBP 1,000. The beneficiary receives a tax credit of GBP 450 and can use it to reclaim tax if they are below the 45% rate.

The pool must contain at least GBP 450 before that distribution can be made without triggering an additional charge. If the tax pool is insufficient to cover the tax credits attached to a distribution, the shortfall is an additional income tax charge on the trust. This is why trustees need to track the pool carefully over the life of the trust.

Trustees who manage this well can match distributions to periods when the pool is healthy. A trust that retains income for several years and pays 45% tax on all of it will build a large pool before making distributions, ensuring beneficiaries can always reclaim the full credit.

Use the CalcHub Income Tax Calculator to model how much of the 45% trust tax credit a beneficiary at a given income level can reclaim.

Accumulation and Retention of Trust Income

A common reason for establishing a discretionary trust is to accumulate income within the trust for a period -- perhaps until a child reaches a certain age -- and then distribute it. The high trust rate makes accumulation expensive from a tax perspective, but the flexibility it offers in timing distributions to lower-rate years for beneficiaries can offset the cost.

For example, if a beneficiary is currently in full-time education with no other income, their personal allowance of GBP 12,570 for 2026/27 means they pay no income tax on the first GBP 12,570 of income received. A distribution from the trust of GBP 10,000 (net) -- with a GBP 450 tax credit per GBP 550 distributed -- could result in the beneficiary reclaiming the entire 45% trust tax credit paid by the trustees, as their own effective rate on the grossed-up income would be zero. Over many years of accumulation followed by targeted distributions, this can produce a significant overall tax saving even though the trustees paid 45% on the way in.

However, trustees should be aware of the parental settlements rules. Where a parent is the settlor and the trust income could benefit their minor unmarried children, HMRC treats any income paid or applied for the benefit of those children as the parent's own income for tax purposes. This anti-avoidance rule effectively removes any income tax advantage of trusts set up by parents for minor children, though the rule ceases to apply once the child reaches 18 or marries.

IHT Entry Charge When Settling Assets Into a Discretionary Trust

Assets placed into a discretionary trust enter the "relevant property" regime for IHT purposes. This means the trust is subject to its own IHT regime, separate from the settlor's personal estate.

When assets above the available Nil Rate Band are settled, an immediate IHT entry charge of 20% applies to the excess. The NRB for 2026/27 is GBP 325,000. Note that the Residence Nil Rate Band (GBP 175,000) is not available to trusts -- it applies only where a residential property passes directly to direct descendants.

If a settlor settles GBP 525,000 into a discretionary trust and has not made other chargeable transfers in the prior seven years, the entry charge is 20% on GBP 200,000 (the excess above GBP 325,000), giving a charge of GBP 40,000. The charge is paid by the trustees from trust assets.

Settlors who want to avoid an entry charge must ensure the total value of assets settled does not exceed their available NRB. Assets settled in stages across different tax years can each use the full NRB (subject to the seven-year cumulation rule), which is why some clients establish trusts and settle assets in tranches rather than a single large transfer.

Ten-Year Anniversary and Exit Charges

Every ten years after the trust was established, a periodic charge applies on the total value of trust assets at that point above the NRB. The maximum rate for the ten-year charge is 6% -- a fraction of the full 40% IHT rate. The actual rate depends on the proportion of the NRB that was used on entry and the value of the assets at the anniversary date.

For a trust holding GBP 600,000 of assets at its ten-year anniversary, with the NRB still at GBP 325,000, the charge would be on GBP 275,000 at 6% -- a maximum of GBP 16,500. In practice many trusts pay less because the calculation involves a complex formula taking account of previous entry charges and related settlements.

Exit charges arise when assets leave the trust during the first ten years or between ten-year anniversaries. The rate is a fraction of the most recent or anticipated ten-year charge, proportional to the number of complete quarters that have passed since the last ten-year point. Exits shortly after a ten-year anniversary or shortly after settlement bear very small charges; exits immediately before a ten-year anniversary bear charges close to the full periodic rate.

Professional trustees typically model these charges as part of trust administration to plan optimal timing for distributions to beneficiaries.

Reporting and Compliance Obligations for Trustees

Trustees of discretionary trusts have significant compliance obligations. They must register the trust with HMRC's Trust Registration Service (TRS) -- this became mandatory for most express trusts in 2022. The TRS requires information about the trust, the trustees, the settlor, the protectors (if any) and the potential beneficiaries.

Trustees must file a Trust and Estate Tax Return (form SA900) each year that the trust receives income or makes chargeable gains. They must pay any income tax due by 31 January following the tax year and make payments on account if applicable. Failure to file or pay on time attracts penalties and interest in the same way as for individual Self Assessment taxpayers.

Where the trust makes capital gains, CGT applies at the trust rate -- currently 20% for most assets (or 24% for residential property above the GBP 3,000 Annual Exempt Amount that trustees share between all related trusts created by the same settlor). The AEA for trusts is the standard GBP 3,000 divided by the number of related trusts, subject to a minimum of GBP 600 per trust.

Use the CalcHub Capital Gains Tax Calculator to model trust gains and the applicable AEA for trustees with multiple related trusts.

When a Discretionary Trust Makes Sense in 2026/27

Despite the high trust rate, discretionary trusts remain widely used for estate planning, asset protection and intergenerational wealth transfer. The key advantages are flexibility -- trustees can adapt distributions to suit beneficiaries' changing circumstances -- and protection of assets from beneficiaries' creditors, divorcing partners or spendthrift tendencies.

For high-net-worth families with assets well above the GBP 500,000 IHT threshold (combining NRB and RNRB), moving assets into trust during the settlor's lifetime and surviving seven years removes those assets from the estate entirely. Each seven-year period effectively gives a fresh NRB, allowing further transfers.

The tax cost of the 45% trust rate during the accumulation period needs to be weighed against these long-term benefits. In many cases professional trustees use trust income to pay premiums on life assurance policies written in trust, so that the death benefits pass outside the estate without entering the relevant property regime at all.

Speak to a qualified trust and estate practitioner before establishing a discretionary trust. The rules are technical, penalties for non-compliance are real, and the tax position of both trustees and beneficiaries needs to be modelled carefully over the expected life of the arrangement.