Discretionary Trusts
A discretionary trust gives the trustees a power to decide which beneficiaries from a defined class receive trust assets, how much, and when. Nobody has a fixed entitlement; instead, the trustees choose, guided by the deed and by a letter of wishes from the settlor.
Used in the right place, a discretionary trust is one of the most flexible tools in estate planning. Used in the wrong place, it brings tax and administrative obligations that outweigh the benefit. We tell you, in writing, which side of that line your case sits on before recommending one.
When a discretionary trust genuinely helps
We typically recommend a discretionary trust where:
- Beneficiaries’ circumstances may change between now and distribution — children may marry, divorce, fall ill, run a business, become bankrupt, or simply become more or less in need than they appear today;
- You want to provide for someone without making the assets directly theirs — for example a beneficiary going through divorce, with creditor pressure, with addiction or capacity issues, or with the kind of financial naivety that makes outright inheritance risky;
- You want to keep options open across a wider class — children and grandchildren in different generations, or a class of beneficiaries the size of which is not yet known;
- You want to retain a “second look” — a properly drafted letter of wishes, refreshed periodically, lets you communicate intent to the trustees without locking in fixed entitlements years before they are needed.
A discretionary will trust on death is a particularly common use, sitting in the will alongside any other legacies and giving the trustees flexibility to react to the family’s circumstances at the time.
Tax — the part most websites do not show you
Discretionary trusts have their own inheritance tax regime under the Inheritance Tax Act 1984. The headline points are:
- A lifetime gift into a discretionary trust above the available nil-rate band attracts an immediate IHT charge of 20 per cent (rising to 40 per cent if the settlor dies within seven years).
- The trust is then subject to periodic charges every ten years of up to 6 per cent of the value above the available nil-rate band at the time of the charge.
- Exit charges apply when capital leaves the trust between ten-year anniversaries.
- Income retained in the trust is taxed at the trust rate (45 per cent on most income above the standard-rate band; 39.35 per cent on dividend income); income paid out comes with a tax credit which the beneficiary can reclaim if their personal rate is lower.
These figures sound steep, and they can be — but they are calculated on value above the nil-rate band, and a properly structured trust will only pay periodic charges on growth above that band. We model the likely tax cost over the life of the trust before you proceed, and we are explicit when a different structure would be cheaper.
When a discretionary trust is the wrong tool
A discretionary trust is not a route to:
- avoid means-tested local authority care charges where care is reasonably foreseeable (deliberate deprivation under the Care Act 2014 / SSWBA 2014);
- shield assets from creditors where insolvency is in prospect (Insolvency Act 1986 sections 339, 340, 342 and 423);
- defeat a claim under the Inheritance (Provision for Family and Dependants) Act 1975 (s.10 anti-avoidance);
- escape inheritance tax where the settlor retains use or benefit of the asset (gift with reservation, s.102 Finance Act 1986).
If a discretionary trust is being marketed to you as a solution to one of these problems, our advice is that it will not work and is likely to be set aside.
How we approach discretionary trust planning
Where a discretionary trust is appropriate, we will:
- explain in writing what the trust will and will not do, including its tax and means-test consequences;
- model the likely periodic and exit charges over the life of the trust;
- draft a tailored deed and a working letter of wishes that gives the trustees enough guidance to act without fettering their discretion;
- suggest suitable trustees — a mix of family members, trusted professionals, and (where appropriate) Clarke & Wright Trust Corporation Limited for continuity;
- agree a review cadence so the structure stays fit for purpose as the family’s circumstances change.
For complex tax positions or non-standard assets we refer to a STEP-qualified solicitor.
Talk to us
If you would like to think through whether a discretionary trust is the right tool for your circumstances, we offer a no-obligation initial conversation.
📞 01743 387210
✉ info@clarkewright.co.uk
Nothing on this page is legal or financial advice. Trust law and the related tax rules are detailed and the right structure depends on your individual circumstances. Personal advice should be sought before acting.