Discretionary Trusts in Estate Planning for Internationally Mobile Families

The discretionary trust is one of the foundational structures of UK and international estate planning for high-net-worth families. Its enduring appeal lies in a combination of flexibility, confidentiality, and — properly structured — significant inheritance tax efficiency. For internationally mobile families with assets in multiple jurisdictions, the discretionary trust takes on additional dimensions: it can span multiple legal systems, hold international assets, and adapt to a family's changing geographic footprint in ways that a simple will cannot.

This guide explains what a discretionary trust is, why the "discretion" matters, how the UK inheritance tax charges work, what the Trust Registration Service requires, and how the 2025 pension and IHT changes affect trust planning in 2026.

What is a Discretionary Trust?

A discretionary trust is a legal arrangement where a settlor (the person creating the trust) transfers assets to trustees to hold and manage on behalf of a defined class of beneficiaries. The distinguishing feature is that no beneficiary has a fixed entitlement to any particular amount of the trust's income or capital. Instead, the trustees have absolute discretion to decide:

• Which beneficiaries receive distributions
• How much each beneficiary receives
• Whether distributions are made at all in any given period
• Whether distributions are of income or capital

The trustees are not free agents — they are fiduciaries, bound by the trust deed and by general trust law to act in the best interests of the beneficiaries as a class. But within those parameters, their discretion is genuine and wide.

Why Discretion Matters

The discretion embedded in the structure is not an administrative nicety. It provides four specific practical benefits that are highly valuable for HNW families.

Creditor protection: assets in a discretionary trust do not belong to any specific beneficiary. A beneficiary facing insolvency, bankruptcy, or personal injury litigation has no legal entitlement to the trust's assets — the trustees can choose not to make distributions to that beneficiary, or to make distributions in kind or to other beneficiaries instead. This is legitimate asset protection, not fraudulent conveyance, provided the trust was established before any threat to the beneficiary was known.

Divorce protection: on divorce, the family courts in England and Wales will take trust assets into account when assessing the overall wealth of a beneficiary, but they cannot compel the trustees to make distributions, and discretionary trust assets are generally treated differently from direct personal assets. A discretionary trust established well before a marriage — or with a clear family wealth continuity purpose — provides meaningful protection against divorce claims on inherited family wealth.

Family flexibility: a trust established today to benefit "children and remoter issue" benefits children not yet born, great-grandchildren, and adopted descendants. The family does not need to make fixed decisions about division now. A child who turns out to need more support (disability, health, career challenges) can receive more; a child who is highly successful independently can receive less. The trustees respond to the family's actual situation, not to what the settlor predicted decades ago.

Confidentiality: unlike probate — which in England and Wales is a public process — trust assets are not disclosed in any public document when the settlor dies. The trust simply continues. For HNW families, this confidentiality can be significant.

UK Inheritance Tax Treatment

Discretionary trusts are not exempt from IHT — they have their own tax regime, known as the "relevant property" regime. Understanding this regime is essential before creating or settling significant assets into a trust.

Entry Charge

When assets first enter a discretionary trust, the transfer is potentially subject to IHT. Assets transferred into a discretionary trust are "chargeable transfers" rather than potentially exempt transfers (PETs). If the value of the assets transferred, together with any previous chargeable transfers in the previous seven years, exceeds the Nil Rate Band (£325,000 in 2026, frozen until at least April 2031), a charge of 20% applies to the excess on entry. (The full rate of 40% applies on death within seven years; the 20% entry rate is the lifetime rate.)

For a settlor with no previous chargeable transfers, the first £325,000 into a discretionary trust in any seven-year period is IHT-free. Couples may use both their NRBs, potentially settling £650,000 free of entry charge. The Residential Nil Rate Band (£175,000 per individual as of 2026) does not apply to trusts.

The 10-Year Anniversary Charge

Every ten years from the date the trust was created, a "periodic charge" applies to the trust's net value. The maximum charge is 6% of the value above the Nil Rate Band available to the trust (taking into account the trust's own NRB usage). For most trusts, this works out at significantly less than 6% in practice.

The practical effect: a trust with £2 million of assets, with £325,000 NRB available, would face a periodic charge on £1,675,000 at up to 6%, or approximately £100,500 every ten years — around 0.5% of the trust's value per year. Compared to the 40% that would apply to the same assets on death without a trust structure, this is substantially tax-efficient for wealth intended to pass through generations.

Exit Charges

When the trustees distribute capital from the trust to a beneficiary (a "capital exit"), a proportionate exit charge applies. The exit charge is based on the effective rate of the most recent periodic charge and the fraction of the ten-year period that has elapsed since that charge. For trustees making regular smaller distributions, exit charges are typically modest.

Income Tax

The trust's income is taxed at the rate applicable to trusts: 45% on non-dividend income, 39.35% on dividend income. However, when income is distributed to a beneficiary, the beneficiary receives a credit for the tax paid by the trust and may reclaim some of it if their personal income tax rate is lower than the trust rate. This makes discretionary trusts less tax-efficient for distributing income to lower-rate taxpayers but broadly neutral for higher-rate taxpayers.

The Nil Rate Band Discretionary Trust on Death

A specific common structure is the Nil Rate Band Discretionary Trust (NRBDT) — a trust created by will into which the first £325,000 of the deceased's estate passes, with the residue going to the surviving spouse (using the spouse exemption).

The NRBDT prevents the NRB from being "absorbed" into the surviving spouse's estate and potentially wasted at the spouse's death. Since 2007, the transferable NRB between spouses has made this less essential for simple estates — the surviving spouse can use two NRBs (potentially £650,000) on their death. However, the NRBDT remains relevant for:

• Protecting the NRB against the spouse's potential remarriage
• Ring-fencing assets for children of a first marriage in blended families
• Providing the surviving spouse access to capital without giving them full ownership (protecting the trust assets from the surviving spouse's estate for IHT purposes if the trust is managed correctly)

Trust Registration Service

Since 2021, UK trusts must be registered with HMRC's Trust Registration Service (TRS). The registration requirement applies to:

• All UK express trusts (trusts deliberately created, as opposed to arising by operation of law), unless specifically exempt
• Non-UK trusts that have UK tax consequences or UK-based assets

The registration captures information about the trust's structure, the trustees, the settlor, and the beneficial owners (the beneficiaries, particularly those with defined entitlements or significant indirect interests). The TRS register is accessible to law enforcement and certain regulated entities (for anti-money laundering purposes) but is not fully public.

Penalties for late registration or failure to keep the register updated are potentially significant. All discretionary trusts established since 2021 should have been registered; all existing trusts at that date were required to register by September 2022.

Offshore Discretionary Trusts

For internationally mobile settlors, an offshore discretionary trust — established in a jurisdiction such as the Cayman Islands, BVI, Jersey, or Guernsey — offers the same core discretionary benefits with some additional considerations:

• The trustee company is typically based in the offshore jurisdiction and managed there
• Following the abolition of the domicile-based system from 6 April 2025, whether non-UK assets in such a trust are "excluded property" (outside UK IHT) now depends on the settlor's residence position — broadly, whether the settlor is a "long-term UK resident" (UK resident for at least 10 of the previous 20 tax years) at the relevant time, rather than on domicile. This can still be advantageous for new arrivals within their first years of UK residence (who may also use the 4-year Foreign Income and Gains regime), but the older "non-UK-domiciled settlor" analysis no longer applies
• The trust remains subject to TRS registration if it has any UK tax consequences
• Distributions to UK-resident beneficiaries may have UK tax implications depending on the nature of the distribution and the UK resident's status

The 2027 Pension and IHT Interaction

From April 2027, unused pension funds will be included in the deceased's estate for UK IHT purposes. Prior to this change, pensions (particularly self-invested personal pensions — SIPPs) were outside the estate, making them a powerful tool for passing wealth to the next generation free of IHT.

Post-2027, the landscape changes: the pension's tax-efficiency as an IHT vehicle is substantially reduced. This shifts attention back towards discretionary trusts and other gifting structures as the primary vehicle for generational wealth transfer. Advisers expect a significant increase in trust establishment activity as pension planning for IHT purposes becomes less effective.

For families with both significant pension wealth and existing trust structures, the interaction between the two — how the pension forms part of the IHT calculation, how it interacts with available NRBs, and whether restructuring to shift some accumulated pension to a trust structure (subject to pension tax rules) makes sense — requires professional analysis.

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This guide describes the UK trust and IHT framework as understood at the date of publication. Trust law and tax rules change; the figures cited (NRB, RNRB, rate thresholds) are subject to annual adjustment and legislative amendment. Nothing here constitutes legal or tax advice; all estate planning decisions should be taken with a qualified solicitor and tax adviser. Cross-border trust arrangements require advice in each relevant jurisdiction.

How Global Investments Can Help

Global Investments works with internationally mobile families on estate planning that spans multiple jurisdictions and asset classes. Our advisers work alongside specialist trust lawyers and tax counsel to design discretionary trust structures that are IHT-efficient, properly administered, and compliant with the Trust Registration Service and all applicable reporting requirements. Contact our team for a confidential review of your estate planning position.