Glossary · UK
What is Discretionary Trust?
A trust where trustees have discretion over how and when income and capital are paid to a defined class of potential beneficiaries.
Full Definition
A discretionary trust gives the trustees power to decide which of a class of potential beneficiaries receives income or capital, how much, and when. No beneficiary has an automatic right to anything, which makes these trusts flexible for protecting vulnerable beneficiaries, controlling access to wealth, and planning for future needs. The flexibility comes with a heavier tax regime. Income retained or paid out is taxed at the trust rates, broadly 45% on most income and 39.35% on dividends, after a standard rate band on the first 1,000 of income (reduced where the settlor has several trusts). For Inheritance Tax, discretionary trusts fall within the relevant property regime: transfers into the trust above the 325,000 nil-rate band are chargeable lifetime transfers taxed at 20% on entry, there is a periodic ten-year anniversary charge of up to 6%, and exit charges apply when capital leaves. Trustees must register the trust with HMRC Trust Registration Service. For Capital Gains Tax the trust has its own annual exempt amount, generally half the individual figure, so 1,500 in 2026/27. Discretionary trusts are powerful but administratively demanding and usually need professional advice.