Discretionary trusts: what they are and how to set up a trust in the UK

What is a trust?

A trust is a way of managing assets such as money, investments, land or buildings for other people, and GOV.UK's guide to trusts and taxes describes three roles. The settlor is the person who puts assets into the trust and whose wishes are usually set out in a trust deed, the trustees are the legal owners who manage the assets and pay any tax, and the beneficiaries are the people who benefit, whether from the income, the capital or both. There must always be at least one trustee, although the trust can carry on when the trustees change.

GOV.UK lists the usual reasons for using one, which include controlling and protecting family assets, looking after assets for someone too young or unable to manage their own affairs, and passing assets on either during your lifetime or through your will.

What are the main types of trust in the UK?

GOV.UK's list of types of trust sets out the main forms, and each one is taxed differently. A bare trust holds assets in a trustee's name for a beneficiary who can take all of the capital and income once they are 18 in England and Wales, or 16 in Scotland, and is often used for young people. In an interest in possession trust the trustees must pass all the income to a beneficiary as it arises, less expenses, whilst the capital is kept for someone else later. An accumulation trust allows the trustees to add income to the capital, a mixed trust combines more than one type, and a settlor-interested trust is one in which the settlor or their spouse or civil partner can benefit.

Some trusts for disabled people and for children under 18 who have lost a parent get special tax treatment, and GOV.UK calls these trusts for vulnerable beneficiaries. A non-resident trust, where the trustees are not UK resident for tax purposes, is subject to rules GOV.UK describes as very complicated.

What is a discretionary trust and how does it work?

A discretionary trust is one in which the trustees, within the terms of the trust deed, decide what is paid out (income, capital or both), which beneficiary receives it, how often and on what conditions. Nobody named in the trust is entitled to anything until the trustees decide in their favour, because, as HMRC's manual puts it, a beneficiary of this kind has only the right to be considered when the trustees make a distribution.

GOV.UK gives two examples of why people choose one: putting assets aside for a future need, such as a grandchild who may need more help than others at some point, and providing for beneficiaries who are not capable or responsible enough to manage money themselves. Others choose one because they cannot yet know how their family's circumstances will change. The trade-off is that you hand real control to the trustees, although a letter of wishes can guide them, and our guide to the letter of wishes explains how it works alongside the trust deed without binding the trustees.

Lifetime trusts and will trusts: what is the difference?

A lifetime trust is one you set up and put assets into whilst you are alive, whereas a will trust is created by your will and only takes effect on your death. The legal structure can be the same, but the timing changes the tax, because a gift into most trusts during your lifetime is a chargeable transfer at the moment you make it, whilst a will trust receives its assets as part of your estate when you die. Our guide to reducing inheritance tax legally sets lifetime trusts alongside the gift exemptions and other allowances.

A lifetime trust also has to be funded properly. MoneyHelper says the trust needs to state clearly the assets it holds, the trustees and beneficiaries, and when it takes effect, and HMRC treats a trust as starting when property is first put into it, so the deed alone achieves little until the assets are transferred. Trusts made by will, including the life interest and property protection trusts that couples consider, are covered in our guide to wills with trusts and property protection trusts.

How is a discretionary trust taxed for inheritance tax?

Discretionary trusts fall within what HMRC calls the relevant property regime, and GOV.UK's guidance on trusts and inheritance tax explains that charges can arise at three points: when assets go in, at each 10-year anniversary and when assets leave. The nil rate band used in these calculations is £325,000, which GOV.UK's table of thresholds shows as fixed until 5 April 2031.

Going in: a lifetime transfer into a discretionary trust is immediately chargeable, so tax is due where your transfers into trust and other chargeable gifts in the previous 7 years total more than £325,000. The rate is 20% on the excess if the trustees pay the tax, and the bill is larger if you pay it, because the tax itself then counts as part of the loss to your estate.

If you die within 7 years: the transfer is recalculated at the full 40% death rate, with credit for the 20% already paid, and our guide to the 7 year rule explains how that period works.

Every 10 years: the trustees pay a charge where the value of the relevant property in the trust is above the nil rate band available to it, and HMRC's manual says the ten year anniversary rate can be anything up to 6%.

Coming out: an exit charge of up to 6% can apply when assets leave the trust, although GOV.UK lists exceptions, including transfers made in the 3 months after the trust is set up or after a 10-year anniversary.

Two further rules apply to homes. If you put your home into a discretionary trust but carry on living in it, GOV.UK says the gift is one with reservation of benefit, so the home still counts as part of your estate, although only the higher of the two possible charges is applied. A home held in a discretionary trust also does not normally qualify for the residence nil rate band, which our inheritance tax threshold guide for 2026/27 sets alongside the other allowances.

How is a discretionary trust taxed for Income Tax and Capital Gains Tax?

The trustees of a discretionary trust pay Income Tax on the trust's income at 39.35% on dividend-type income and 45% on all other income, according to GOV.UK's page on trusts and Income Tax. Most trusts pay no Income Tax where their income is no more than a tax-free amount, normally £500, but once income goes above it tax is due on the full amount, the £500 is shared out if the same settlor has made more than one such trust (falling to £100 each where there are 5 or more) and trustees do not get the dividend allowance. Payments the trustees make to beneficiaries are treated as already taxed at 45%, so a beneficiary who pays tax at a lower rate may be able to claim some back.

For Capital Gains Tax, trustees pay 24% on gains in 2026/27, and GOV.UK puts the trust's annual tax-free allowance for the year at £1,500, or £3,000 where a beneficiary is vulnerable, with a smaller allowance possible where the settlor has made more than one trust. A gain on UK residential property has to be reported and paid within 60 days of completion, and when you transfer an asset into a trust it is you, as settlor, who may owe tax on any gain at that point.

What are a trustee's duties?

Trustees have to manage the trust in the beneficiaries' interests and in line with the trust deed, and in England and Wales the Trustee Act 2000 sets a statutory duty of care, which means exercising the care and skill that is reasonable in the circumstances, taking account of any special knowledge or experience the trustee has and, for a professional trustee, what can reasonably be expected of someone in that line of work. That duty applies to investing, unless the trust deed says it is not meant to, and the Act requires trustees to consider whether investments are suitable and diversified, to review them from time to time and to take proper advice unless they reasonably decide it is unnecessary.

Trustees also have administrative duties. HMRC's guidance on whether you need to register a trust says most UK express trusts must be registered on the Trust Registration Service even where no tax is due, with registration within 90 days of the trust being created or becoming liable to tax, unless they fall within a listed exclusion such as a trust holding a life policy that only pays out on death, illness or disability, which our guide to life insurance in trust explains. HMRC can charge a fixed £5,000 penalty for failing to register or to keep the details up to date, although its guidance says it will not do so where trustees put things right within the time limit it sets. Changes must be updated within 90 days, and a taxable trust must confirm its details by 31 January after each tax year in which it has a tax liability. Trustees also send a trust and estate tax return when there is income or gains, report inheritance tax charges on form IHT100 and keep records.

How do you set up a trust?

Setting up a trust usually means deciding what it is for, having a solicitor draft the trust deed (or the trust wording in your will), choosing trustees and then transferring the assets to them. GOV.UK suggests a legal or tax adviser and points to the Society of Trust and Estate Practitioners (STEP) for help, whilst MoneyHelper recommends speaking to a solicitor or independent financial adviser and warns that trust law is complicated and a mistake can trigger an immediate tax charge.

MoneyHelper suggests at least two trustees, and probably no more than three or four, usually family members or friends you trust. It says a basic trust may cost little to set up, whereas more complex trusts need specialist advice and cost more, and that a company acting as trustee will charge for doing so, so the cost depends mainly on how complex the trust is and whether professional trustees are involved. A council in England can also look at a trust set up with care costs in mind, because the Care and Support Statutory Guidance lists putting assets into a trust that cannot be revoked as one way a person may deprive themselves of assets, and it tells councils to consider whether avoiding care charges was a significant reason for the timing and whether the person could reasonably have expected to need care.

Scotland has its own trust law, and many provisions of the Trusts and Succession (Scotland) Act 2024 come into force on 14 December 2026, so a Scottish trust needs a Scottish solicitor, although HMRC's manual says tax law applies uniformly across the UK.

What to do next if you are thinking about a trust

1. Write down what you want the trust to do and for whom, because that decides which type of trust fits.

2. List the assets you might put in and roughly what they are worth, together with any chargeable gifts you have made in the last 7 years.

3. Think about who could serve as trustees for the life of the trust, and talk to them before naming them.

4. Take advice from a solicitor or a STEP practitioner on the drafting and the tax, and an independent financial adviser on investments.

5. Once the trust exists, put the Trust Registration Service deadline and the 10-year anniversary date in writing for your trustees.

Whatever sits in a trust, your executors will still have to find and notify every bank, utility, insurer and subscription in your own name after you die, which is far quicker when you have left a clear record of what you held, and if that work does fall to your family, Legacy Trail's free notification service can contact the private-sector companies for them.