Discretionary trusts: at a glance
- What do I need to know? Discretionary trusts give trustees control over how and when to gift money and assets to beneficiaries.
- What does it mean for me? A discretionary trust could give you greater flexibility when estate planning. But the structure and tax rules are more complex than other types of trust.
- Why does it matter? Learning about the different types of trust can help you find the right approach for your estate planning.
Trusts are just one of the ways families intend to transfer up to £7tn of their wealth to younger generations.
Despite their complexity to set up and manage, recent government data reveals there were over 835,000 registered trusts and estates in the UK in 2025, earning over £3.6bn in income from their assets.
In this guide, you’ll learn about a specific type of trust fund known as a discretionary trust. You’ll discover how they work and their advantages and disadvantages compared to other trust types.
The roles within a trust
In general, there are three key roles involved with the management of most trusts. These include:
- Settlor: the payee of the trust
- Trustee: the manager of the trust
- Beneficiary: the recipient(s) of money and assets
What are discretionary trusts?
Discretionary trusts take their name from how they distribute assets. Trustees have discretion over how and when they transfer income and assets to beneficiaries. This means beneficiaries aren’t guaranteed entitlements, which is different to bare trusts.
But discretionary trusts also come with more complex tax rules. This includes how HMRC treats gifts for Inheritance Tax purposes. Discretionary trusts can technically stay open as long as 125 years (though this is unusual).
This differs from many kinds of fixed trusts, which often dissolve once a beneficiary reaches a milestone (like their eighteenth birthday).
How do discretionary trusts work?
The settlor places money and assets into the trust - typically with the help of a solicitor to make sure they avoid making costly mistakes.
The trustee has complete flexibility and control over wealth distribution in a discretionary trust. The trustee isn’t required to transfer assets at all if they decide to withhold funds.
Control is the key
The settlor can leave written requests for how they would like the money to be used, which the trustees can follow if they wish. But these requests have no legal status.
For example, the trustee may disagree with the settlor, deciding the beneficiary lacks the financial literacy to spend the money responsibly when they turn 18 years old. So, the trustee might hold the money longer and gift the beneficiary a smaller sum a few years later, with instructions to spend it on a deposit for a house.
Advantages and disadvantages of discretionary trusts
Understanding the limitations and benefits of discretionary trusts can help you decide if they’re the right type of trust for you and your family.
| Advantages | Disadvantages |
| Control through a trustee | Trustee might make decisions you disagree with |
| Settlor can leave requests | Requests are not legally binding |
| Trustees can prevent mismanagement | Risk of perceived unfairness by beneficiaries |
| Funds released when trustee chooses | How trustee distributes wealth may affect taxes |
Taxation of discretionary trusts
Tax rules can become more complicated with discretionary trusts. This is due to their flexibility and uncertainty surrounding wealth transfers.
Working with a financial adviser is essential when opening a trust to make sure you set it up correctly. Qualified financial advice can also help you understand exactly how and when HMRC charges tax on the assets you transfer in and out of a discretionary trust.
Income Tax in a discretionary trust
HMRC charges Income Tax on earnings from assets held in a discretionary trust, including interest earned on cash, dividends from shares, and rental income.
While wealth is held in trust, the trustee pays Income Tax at a special rate. This is 39.35% on dividend income and 45% on all other earnings, after a tax-free allowance that’s usually £500. The exact tax-free amount you’re entitled to depends on your personal circumstances.
Once the trustee distributes the money and assets, beneficiaries may become responsible for paying Income Tax on money they receive at their personal tax rate.
Discretionary trusts and Inheritance Tax
HMRC charges Inheritance Tax (IHT) at 20% of the value of money and assets transferred into the trust that exceed the £325,000 nil-rate band (the tax-free allowance most estates receive). The settlor is usually responsible for paying this charge when making the transfer into the trust.
If the settlor passes away within seven years of making the transfer, you may need to pay additional Inheritance Tax. This could increase the total tax on the transfer to as much as 40%, although taper relief could reduce the amount payable. This is due to the seven-year rule.
Periodic or anniversary IHT charges
HMRC also charges periodic Inheritance Tax on the trust every 10 years. Periodic charges can be complicated as they depend on the value of assets held in the trust and how HMRC classifies them for Inheritance Tax purposes. Your charges also depend on whether HMRC classifies the assets as ‘relevant property’.
There is also an exit charge, which HMRC applies when you transfer money or assets out of the trust. The exit charge depends on:
- the amount of time since the last 10-year periodic charge
- the value of transferred assets
Exit charges can be complicated, so it’s worth reading the latest HMRC guidance and speaking to a financial adviser to ensure you’re aware of the impact on your finances.
Discretionary trusts and Capital Gains Tax rules
HMRC charges Capital Gains Tax (CGT) at 24% on profits earned by selling assets held in a trust above an annual, £1,500 tax-free allowance. Trustees are responsible for paying CGT when assets are sold or disposed of within a discretionary trust, unless it’s a property owned by the trust itself.
Discretionary trusts vs. fixed trusts
There are a handful of key differences between discretionary and fixed trusts.
| Feature | Discretionary trusts | Fixed trusts |
| Control | Trustees determine distribution | Beneficiary has absolute right |
| Flexibility | Highly flexible | Permanent |
| Tax rules | Complex | Simple (depending on type) |
Frequently asked questions about discretionary trusts
What are nil-rate band discretionary trusts?
Nil-rate band discretionary trusts (NRBDTs) are an Inheritance Tax tool designed to pass on the full tax-free estate allowance of £325,000 to another entity.
Setting up an NRBDT allows the settlor to gift this portion of an estate without an immediate Inheritance Tax charge when it’s placed into the trust.
How much does it cost to set up a discretionary trust?
Setting up a discretionary trust can be costly and require specialist support. You’ll need to pay for a solicitor and financial adviser to structure the trust correctly and write it into law. You might also have to pay for valuations of some assets. And there might be ongoing fees payable to trustees, solicitors, and accountants.
You may decide these fees are worth it to give your trustees greater control over how and when they distribute your wealth on your behalf. But it’s important to consider other methods of transferring wealth, like lifetime gifting and Junior ISAs.
Can discretionary trusts hold money on a savings platform?
Yes, discretionary trusts can open an account on Flagstone’s savings platform, with trustees managing how funds are held and distributed within the account. You can open a Flagstone account as a trust with a deposit of £100,000 or more, which you can spread across multiple account types.
This gives trustees control over money management, balancing growth and access across a range of high-interest savings accounts.
Prioritise control and flexibility with discretionary trusts
Nominating a trustee to manage how you gift wealth to loved ones can provide the flexibility to adapt plans based on changing life circumstances. So, your beneficiaries are best equipped to protect and grow the wealth they inherit.
This gives you the confidence to not only gift wealth to your family but also shape how these gifts are made to leave a financial legacy that lasts generations.
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