Trusts are one of the most misunderstood structures in personal financial planning. Mention a trust and many people imagine offshore secrecy, complex legal documents, or ultra-high-net-worth arrangements that do not apply to them. In reality, a discretionary trust is a well-established legal mechanism that can serve quite practical purposes — but it does need to be understood before it is used.
What a trust is
A trust is a legal arrangement where one person (the settlor) transfers assets to another person or corporate entity (the trustee) to hold and manage for the benefit of a defined group of people (the beneficiaries).
The critical feature is that the assets are no longer owned by the settlor — they belong to the trustees, who hold them on behalf of the beneficiaries. This separation of legal ownership from beneficial ownership is what makes trusts useful for estate planning and asset protection.
The parties to a discretionary trust
The settlor is the person who creates the trust and transfers assets into it. In the UK, a settlor can be an individual or a company. Once assets are transferred, the settlor generally gives up legal ownership — which is both the point and a constraint.
The trustee manages the trust assets and exercises the trust's powers. Trustees have legal duties: to act in the interests of the beneficiaries, to invest prudently, to keep records, and to comply with the trust deed and relevant law. Trustees can be individuals (often family members or solicitors) or professional trust companies. Professional trustees in reputable jurisdictions are regulated.
The beneficiaries are the people who may benefit from the trust. In a discretionary trust, beneficiaries do not have a fixed entitlement — they are merely eligible to benefit. Whether they receive anything, and how much, is at the trustees' discretion.
The protector is an optional role, more common in offshore trusts, that provides an oversight mechanism. The protector typically has the power to replace trustees, veto certain decisions, and ensure the settlor's intentions are carried out. It is a safeguard without amounting to control.
How distributions work
In a discretionary trust, trustees have the power to decide:
- Who among the beneficiaries receives income or capital
- How much they receive
- When they receive it
This flexibility is the defining characteristic. It allows trustees to respond to changing circumstances — a beneficiary who develops a disability and needs additional support, a beneficiary who has become significantly wealthy and does not need a distribution, a beneficiary who is going through a difficult divorce (and whose assets might otherwise be at risk).
For families with complex circumstances — international residency, mixed domicile, different tax positions across generations — this flexibility can be genuinely valuable.
UK tax treatment of discretionary trusts
Discretionary trusts established by UK-domiciled settlors are subject to specific UK tax rules, which are not straightforward.
Income tax. Discretionary trusts pay income tax on trust income at 45% (or 39.35% on dividends). When income is distributed to a beneficiary, the beneficiary receives a tax credit for the tax paid by the trust. Higher-rate taxpayers may owe additional tax; basic-rate taxpayers receive a refund. The administration is more complex than direct ownership.
Capital gains tax. Trusts pay CGT at 24% on trust gains above the annual exempt amount (which for trusts is half the individual allowance). Since 30 October 2024 the 24% rate applies to both residential property and other chargeable assets.
Inheritance tax — the 10-year charge. UK discretionary trusts are subject to a periodic charge of up to 6% on the value of trust assets above the available nil-rate band every 10 years. This is the most important cost to understand. On a trust holding £1,000,000, the 10-year charge could be up to £60,000 (though calculating it precisely requires knowledge of the nil-rate band used at the time of settlement and subsequent additions).
Exit charges. When assets leave the trust — whether through distribution to a beneficiary or by the trust being wound up — a proportionate exit charge may apply.
These charges mean that UK discretionary trusts are not tax-free structures. They can still be beneficial if the primary purpose is not IHT saving but rather flexibility, protection, or succession planning.
Offshore discretionary trusts and the residence-based regime
For individuals who were not UK-domiciled, offshore discretionary trusts have historically offered significant IHT advantages — but the framework changed fundamentally on 6 April 2025.
Excluded property trusts. Under the old regime, non-UK assets settled into a trust by a non-domiciled individual before they became deemed domiciled were treated as excluded property for IHT purposes — outside the scope of UK inheritance tax, often indefinitely. From 6 April 2025 the remittance basis and the whole concept of domicile (and "deemed domicile") were abolished for tax purposes and replaced by a residence-based system. IHT exposure now turns on whether you are a "long-term UK resident" — broadly, UK-resident for at least 10 of the last 20 tax years — rather than on domicile.
The effect is that whether assets within an existing excluded property trust remain protected, and whether a new trust can shelter non-UK assets, now depends on the settlor's residence history rather than domicile. Excluded property trusts settled before 6 April 2025 retain some transitional protection, but the position is intricate and the interaction with the new long-term-residence test requires careful analysis. This is not an area where general guidance is sufficient — specific advice is essential.
When a trust makes sense
A discretionary trust is worth considering when:
- You have substantial assets and want to pass them to the next generation in a structured way rather than outright
- Your beneficiaries include vulnerable individuals (minors, adults with disabilities, or individuals with poor financial judgement)
- You want to protect assets from the beneficiaries' potential divorce settlements or creditor claims
- You are a recent or non-UK-resident arriver wishing to protect non-UK assets from future UK IHT exposure under the residence-based regime
- You want to avoid UK probate on death (trust assets do not pass under a will and are therefore outside probate)
A trust is not worth considering when:
- The administrative cost (professional trustee fees, accountancy, legal) would exceed the benefit
- The assets involved are modest
- Simpler alternatives — such as direct gifts, joint ownership, or ISA and pension wrappers — achieve the same result
- The settlor is unwilling to genuinely relinquish control of the assets
The costs of running a professional offshore trust typically start at £2,000–£5,000 per year and rise with complexity. A trust makes financial sense when the assets involved are sufficient to justify this overhead.
Frequently asked questions
Can I be a trustee of my own discretionary trust? In some offshore trust jurisdictions, the settlor can act as a trustee. In the UK, the tax and legal position is more complex — if the settlor retains effective control as trustee, HMRC may treat the trust as a sham or apply settlor-interested trust rules, which significantly reduce the tax planning benefits. Professional independent trustees provide cleaner structure and legal robustness.
What happens to a trust if the settlor dies? The trust continues under the control of the surviving trustees. The trust deed should nominate successor trustees in case of death or incapacity of any trustee. The trust assets do not form part of the deceased settlor's estate (this is one of the key IHT planning benefits), though the trust's own IHT position — including the 10-year charge — continues independently.
Can a trust hold property? Yes. A discretionary trust can hold UK or overseas property, provided the trust deed permits this. Holding UK residential property in a trust does not avoid the standard SDLT and NRCGT positions — if anything, trusts can attract higher SDLT rates depending on whether the trustee is treated as a corporate entity. Seek specific advice on property within a trust.
How are trust assets invested? Trustees have a duty to invest prudently under the Trustee Act 2000 (UK). They can invest across a wide range of assets — equities, bonds, property, cash — using discretionary managers or by directing investment themselves. Professional trustees typically appoint an investment manager. The terms of the trust deed may specify investment parameters or exclusions.
What is the difference between a bare trust and a discretionary trust? A bare trust gives a specific beneficiary an absolute, immediate entitlement to the trust assets — the trustee is simply a legal nominee. There is no discretion. A discretionary trust gives trustees the power to decide who benefits and how much — no beneficiary has an automatic entitlement. The legal, tax, and planning implications differ substantially between the two structures.
Summary
A discretionary trust is a flexible, legally robust structure for managing and passing wealth across generations. In the right circumstances — particularly for internationally mobile families and individuals with non-domicile status — it remains one of the most powerful tools available. But it involves real costs, real tax obligations, and real legal complexity. It should always be established with proper legal and tax advice.
How Global Investments can help
We advise internationally mobile clients on the role of discretionary trusts in wealth and estate planning, working alongside specialist trust lawyers and tax counsel to ensure structures are properly established and maintained. Contact us to discuss whether a trust structure is appropriate for your circumstances.
This article is for general information only and does not constitute legal, tax, or financial advice. Trust law and tax treatment vary by jurisdiction.
This article is for general information only and does not constitute financial, legal or tax advice. Rules, prices and regulations change; verify current requirements with a qualified adviser before acting.