Glossary · UK
What is Discretionary Trust Rate (45%)?
The 45% income tax rate applied to income accumulated within a discretionary trust that exceeds the trust's £1,000 standard-rate band.
Full Definition
Discretionary trusts -- in which trustees have the power to decide how and when to distribute income and capital among a class of beneficiaries -- are subject to a special income tax regime that is more punitive than individual rates. Income retained within the trust (rather than mandated to beneficiaries) is taxed at the "trust rate": 45% on all income except dividends, and 39.35% on dividend income. However, the first £1,000 of income each tax year (the standard-rate band) is taxed at the basic rate (20% for non-savings, non-dividend income) or the applicable lower rate. Above the £1,000 standard-rate band, the full trust rate applies. This is broadly equivalent to the additional rate for individuals (45% on non-savings income; 39.35% on dividends), so discretionary trusts are treated as high-rate taxpayers from a very low income threshold. When trustees make distributions to beneficiaries, the beneficiary can reclaim all or part of the 45% tax credit if they are a non-taxpayer or basic/higher rate taxpayer. Trusts also have a ten-year anniversary charge of up to 6% on the value of the relevant property (broadly assets above the nil-rate band) and exit charges when assets leave the trust. Given the complexity and tax cost, discretionary trusts are most useful for estate planning, protecting assets for vulnerable beneficiaries, or accumulating income for future distribution when beneficiaries are in lower tax bands.