Discretionary Trusts

A Discretionary Trust (“DT”) is a trust in which the trustees have discretion over whether, when, and how much any beneficiary receives from the trust fund (income and/or capital). No beneficiary has an automatic, fixed entitlement unless and until the trustees exercise their powers in that person’s favour.

This flexibility is precisely why Discretionary Trusts are so widely used in estate and succession planning: they are designed for situations where the future is uncertain—family dynamics change, beneficiaries’ needs evolve, and risks (divorce, insolvency, dependency, long-term care) cannot be predicted with confidence.

Many “named” trusts are Discretionary Trusts underneath

In practice, many trusts described with client-friendly labels are implemented as discretionary trusts at the legal level, because the discretionary framework provides the control and adaptability the label is trying to describe.

Examples that are often discretionary “under the hood” include:

Family / legacy trusts (where trustees decide who benefits over time)
Asset protection trusts (where controlled distributions are essential)
Investor or portfolio trusts (where trustees manage and allocate investment returns)
Business/shareholding trusts (where trustees hold shares and control distributions)
Pilot trusts (commonly discretionary by design)

The headline name typically describes the planning purpose. The discretionary trust is often the legal mechanism used to achieve it.

Core parties and how a DT works

A DT typically involves:

Settlor: the person who creates the trust and contributes assets
Trustees: the legal owners who manage the trust and make distribution decisions
Beneficiaries: those who may benefit, as and when trustees decide

Trustees must act within the powers in the trust deed and in accordance with fiduciary duties. In well-designed DT planning, a letter of wishes is often used to guide trustees without removing flexibility.

HMRC tax position: the “relevant property” regime

For UK tax purposes, most discretionary trusts fall within the relevant property regime. The key consequence is that IHT is not a single one-off charge, but can arise at three stages:

When assets enter the trust (the “entry” charge)
At each 10-year anniversary (the “periodic” charge)
When assets leave the trust (the “exit” charge)

The headline principle: HMRC treats a discretionary trust as a long-term holding vehicle and applies a rolling IHT framework to it.

1) Entry charge (lifetime transfers into a DT)

A lifetime transfer into a discretionary trust is usually a Chargeable Lifetime Transfer (CLT).

CLTs are tested against the settlor’s available Nil Rate Band (NRB) when made.
To the extent the CLT (plus other CLTs in the preceding 7 years) exceeds the available NRB, an immediate IHT charge at 20% can arise (with grossing-up implications depending on who pays).
If the transfer is within the available NRB, the entry charge is typically 0%.

This “entry” treatment is a major reason discretionary trust planning often involves careful sequencing, accurate valuations, and attention to prior chargeable transfers.

2) Ten-year (“periodic”) charges

On each 10-year anniversary, IHT may be charged on the value of relevant property in the trust, broadly above the NRB available to the trust at that time. The rate is up to 6%.

Practically, this means discretionary trusts do not usually face a 40% death charge in the way personal estates can. Instead, HMRC applies a lower periodic charge at defined intervals (subject to the trust’s value and available NRB).

3) Exit charges

When assets leave a relevant property trust, an exit charge may apply, again up to 6% depending on timing and the trust’s historic position since the last 10-year anniversary.

Many “named” trusts are discretionary trusts in substance because discretion is the mechanism that makes long-term planning workable.

Income tax position for Discretionary Trusts

Discretionary trusts are generally subject to trust rates of income tax, which are higher than most personal rates:

45% on most non-dividend income
39.35% on dividend-type income

Trustees must also manage practical administration (including reporting and the “tax pool” mechanism where relevant), which is one reason DTs should be used where the planning benefits justify the compliance.

Capital gains tax position for Discretionary Trusts

Trustees pay CGT when gains exceed the trust’s annual exempt amount. For 2025/26, the annual exempt amount for trusts is:

£1,500, or
£3,000 where the beneficiary is classed as vulnerable in the statutory sense

(Trust CGT rates depend on the asset type and circumstances, and are applied at trustee level.)

The “NRB reset” explained clearly

People often hear that the NRB “resets” and that this is relevant to trust planning. The accurate principle is this:

The 7-year “cumulation” period

When assessing IHT on lifetime chargeable transfers (including CLTs into a discretionary trust), HMRC looks at the settlor’s chargeable transfers made in the previous seven years. Those earlier CLTs reduce the NRB available to shelter the new transfer.

What “reset” means in practice

If the settlor makes no further chargeable lifetime transfers for seven years, earlier CLTs fall outside the seven-year cumulation window. In practical terms, this can mean the settlor’s full NRB becomes available again for new CLTs (subject to other rules and the settlor’s circumstances).

So “resetting the NRB” is not a magical refresh on a calendar date; it is the effect of time passing such that prior chargeable transfers are no longer counted in the seven-year cumulation calculation.

Why Discretionary Trusts are used so often

A DT is frequently chosen where clients want:

Control without rigidity (trustees can respond to real life rather than forecasts)
Protection (against vulnerability, coercion, divorce, insolvency, or dependency)
Long-term stewardship (assets managed across generations)
Orderly succession (avoiding forced fragmentation or immediate outright ownership)

The price of that flexibility is administration and tax complexity—hence the importance of designing the trust correctly from the outset and aligning it with the wider estate plan.

How CHC Legal assists

CHC Legal supports Discretionary Trust planning by:

Establishing the planning objective and mapping it onto an appropriate trust structure
Drafting trust documentation (including trustee powers and safeguards)
Coordinating trust planning with wills, property ownership structures, and succession design
Supporting trustees with the practical realities of operating a DT over time

Summary

A Discretionary Trust is one of the most adaptable trust structures available. Many “named” trusts are discretionary trusts in substance because discretion is the mechanism that makes long-term planning workable. The tax treatment is clear in principle—entry, periodic, and exit charges under the relevant property regime; trust-rate income tax; trustee CGT with a modest annual exemption—and the NRB “reset” operates through the seven-year cumulation window.

Discretionary Trusts