Discretionary trusts in wills: when they help and what they cost

What a discretionary trust is

A discretionary trust is one in which the trustees decide who benefits. The will defines a class of possible beneficiaries, which might be the spouse, the children, the grandchildren and their spouses, and gives the trustees power to pay income or capital to any of them, in any shares, at any time, or to none of them and to accumulate the income instead. No beneficiary has a right to anything until the trustees decide to give it to them.

That is the whole of the design, and it is the opposite of the life interest trust described in life interest trusts in wills, where the life tenant has a fixed right to the income and the trustees have no choice about paying it. The general background to trusts is in trusts explained.

In a will the discretionary trust usually takes the residue, or a defined share of it, or a sum up to the nil rate band. The trustees named in the will hold it, and most such trusts are wound up within a generation.

When it is the right structure

The case for a discretionary trust is that the person making the will cannot know what their family will need. Four situations recur.

A vulnerable beneficiary. A child or adult who cannot manage money, whether through disability, addiction or simple inexperience, is better served by trustees who can pay for what they need than by a lump sum they cannot handle. Where the disability is such that the beneficiary qualifies, the disabled person's trust described below is usually the better vehicle.

Means-tested benefits. An outright inheritance of even a modest sum can take a beneficiary above the capital limits for means-tested benefits and for social care support. A discretionary trust gives them no capital of their own, because they have no right to anything, and the trustees can meet expenses that the benefits do not.

Divorce or bankruptcy. A beneficiary whose marriage is failing, or whose business is in trouble, will lose part of an outright inheritance to their spouse or their creditors. Money the trustees hold at their discretion is not the beneficiary's, though a family court can take the trust into account as a resource where the trustees have a pattern of paying out on request.

Flexibility. A will made when the children are young and their circumstances unknown can leave the residue to trustees who will decide, twenty years on, that one child needs more than another. The trust lets the decision wait until the facts are known.

The letter of wishes

Because the will gives the trustees the decision, the person making it writes a separate letter of wishes explaining how they would like the discretion to be used. It might say that the surviving spouse should be treated as the main beneficiary during their lifetime, that the children should share equally after that, that a particular child should receive nothing while they are in a particular relationship, or that a grandchild's education should be paid for.

The letter does not bind the trustees. A letter that purported to bind them would turn the trust into something else and lose the protection that comes from nobody having a right to the fund. It guides them, and a trustee who departs from it needs a good reason. It is private, unlike the will, which becomes a public document once probate is granted, so it is the right place for anything the family should not read at the Probate Registry.

It should be reviewed whenever the will is, and it should be kept with the will. A discretionary trust with no letter of wishes leaves the trustees guessing what was intended, and that is the situation the trust was meant to avoid.

Inheritance tax: the relevant property regime

This is the cost. A discretionary trust is relevant property under the Inheritance Tax Act 1984, and relevant property has its own charging regime, separate from the person who made the will and from the beneficiaries.

On entry, the assets pass into the trust as part of the estate on death and are taxed then as part of the estate, at 40 per cent above the available nil rate band. Where the trust is limited to the nil rate band there is nothing to pay at that point, which is why nil rate band discretionary trusts were common before the transferable nil rate band existed.

Section 64 of the Act charges tax on the value of the relevant property at each ten-year anniversary of the trust. Section 66 sets the rate at three tenths of the effective rate that would apply to a hypothetical lifetime transfer of the same amount, and because the lifetime rate is 20 per cent, the maximum is 6 per cent of the fund. In practice the rate is lower, because the trust's own nil rate band, currently £325,000 on gov.uk, is set against the value first, and the settlor's chargeable transfers in the seven years before death reduce that band. A trust worth less than the nil rate band at the anniversary pays nothing.

Section 65 charges tax when property leaves the trust, whether because the trustees appoint it to a beneficiary or because they do something that reduces its value. The exit charge is a proportion of the rate that applied or would have applied at the last ten-year anniversary, scaled by the number of complete quarters since. Section 65 also provides that there is no charge on an exit within the first quarter after the trust starts or after an anniversary, and no charge on payments that are income for tax purposes or that are costs properly attributable to the property.

The arithmetic means that a trust of £500,000 with a full nil rate band might pay a little over 1 per cent at its first anniversary, and a trust of £2 million might pay close to the 6 per cent maximum. The charges are modest against 40 per cent on death, and they buy the flexibility. They are also a compliance burden: each anniversary needs a valuation and a return, and each exit needs a calculation.

Income tax and capital gains tax

The trustees are taxable on the trust's income and gains, and the figures here are gov.uk's for the 2026 to 2027 tax year, checked on 22 September 2026.

A discretionary trust pays income tax at the trust rate of 45 per cent on most income and at 39.35 per cent on dividends. The first £500 of income is taxed at the standard rates, and that £500 band is divided between all the trusts the same person has set up, so a person with five trusts has £100 each. When the trustees pay income to a beneficiary, it carries a 45 per cent tax credit, and a beneficiary who pays tax at a lower rate can reclaim the difference. A trust that pays income out to a basic rate taxpayer therefore recovers most of the cost, while a trust that accumulates does not.

The trustees pay capital gains tax at 24 per cent on gains above the trustees' annual exempt amount, which is £1,500 for 2026 to 2027, or £3,000 where the beneficiary is vulnerable. The exempt amount is also divided between trusts made by the same settlor. Where the trustees appoint an asset out to a beneficiary, a holdover election can defer the gain to the beneficiary, since the appointment is a chargeable event for inheritance tax.

The practical effect is that a discretionary trust is an expensive place to hold income-producing investments over a long period unless the income is being paid out to beneficiaries who pay less tax. Trustees who intend to accumulate should compare the cost against an outright gift and a life interest trust.

The trustees' duties

Discretion is the trustees' power and it is also their exposure. They have to consider, from time to time, whether to exercise it and in whose favour, and a trustee who never turns their mind to it is in breach. They have to act unanimously unless the will says otherwise, keep accounts, invest the fund in accordance with the Trustee Act 2000, take advice where a reasonable trustee would, and treat the class of beneficiaries even-handedly. That means considering each of them before any payment, whoever asked for it.

They have to file the trust's tax returns, pay its tax, and make the ten-year and exit charge returns on time. They have to provide beneficiaries with information about the trust, though a discretionary beneficiary's right to see documents is narrower than a fixed beneficiary's and the letter of wishes is usually withheld.

A lay trustee can do all of that with professional support. A lay trustee who is also a beneficiary, or the parent of one, has a conflict, and a will that makes the surviving spouse sole trustee of a trust of which they are a beneficiary should say expressly that they may benefit from their own decisions, or it may be unable to help them at all.

Registering the trust

HMRC's Trust Registration Service requires most express trusts to be registered whether or not they pay tax. Gov.uk says a trust must be registered within 90 days of being created or becoming liable to tax. A will trust that takes assets from the estate and is wound up within two years of the death does not have to register unless it incurs a tax liability, which gives trustees who intend to distribute quickly a way out of the paperwork. A discretionary trust that is to run on registers, and the trustees keep the register up to date when trustees or beneficiaries change.

The two-year point has a second significance. Where the trustees appoint the trust fund out to beneficiaries within two years of the death, section 144 of the Inheritance Tax Act 1984 reads the appointment back into the will for inheritance tax, as if the deceased had made the gift directly. A discretionary trust of residue therefore gives the executors and trustees two years to decide how the estate should be divided with the benefit of hindsight, and a trust used that way is a common piece of drafting even where nobody expects it to last.

The disabled person's trust alternative

Where the beneficiary is disabled, the discretionary trust is usually the wrong choice, because a better one exists. Section 89 of the Inheritance Tax Act 1984 treats a disabled person as having an interest in possession in a trust where, during their life, no other person has an interest in possession and any capital or income applied is applied for the disabled person's benefit, subject to an annual allowance for others of the lower of £3,000 and 3 per cent of the fund. The trust is then outside the relevant property regime: gov.uk confirms there is no ten-year charge and no exit charge while the assets stay in the trust for the beneficiary.

Gov.uk defines a vulnerable beneficiary for this purpose as a person who is eligible for certain disability benefits, including personal independence payment, disability living allowance and attendance allowance, whether or not they claim them, a person unable to manage their affairs because of a mental health condition, or a bereaved minor under 18 whose parent has died. The trustees can make a vulnerable person election, after which the trust's income tax and capital gains tax are reduced to what the beneficiary would have paid on the same income and gains personally, and the trustees' annual exempt amount rises from £1,500 to £3,000.

The trust still has to be drafted so that the beneficiary has no right to capital, which keeps it outside the means test for benefits, and the trustees still need a letter of wishes. What changes is the tax.

Deciding whether it is worth it

A discretionary trust earns its place where the reason for it is strong: a beneficiary who would lose an outright gift, a family whose needs cannot be predicted, or an estate large enough that two years of flexibility after the death is worth having. It costs an annual tax return, a valuation and a return every ten years, a charge of up to 6 per cent at each of them, and income tax at the trust rate on anything accumulated.

Where the aim is to provide for a spouse and then the children, a life interest trust does it with none of those charges. Where the aim is to provide for a disabled child, the section 89 trust does it with most of the flexibility and few of the costs. Where the aim is to give the trustees two years to arrange the estate, a discretionary trust of residue that is appointed out within that period pays no ten-year charge and need not register. The right answer is the trust that fits the reason, and the AD Wills service, described on the wills page, can draft any of the three.

Frequently asked questions

What is a discretionary trust in a will?

It is a trust in which the trustees named in the will decide which of a class of beneficiaries receives income or capital, when, and how much, and no beneficiary has a right to anything until the trustees decide. The person making the will writes a separate letter of wishes to guide the trustees. It is used where a beneficiary is vulnerable, on means-tested benefits or at risk from divorce or bankruptcy, or where the family's future needs cannot be predicted.

What are the ten-year and exit charges?

A discretionary trust is relevant property under the Inheritance Tax Act 1984. Section 64 charges tax on the fund at each ten-year anniversary, and section 66 sets the rate at three tenths of the lifetime rate, so a maximum of 6 per cent, after the trust's nil rate band of £325,000 has been set against the value. Section 65 charges a proportionate amount when capital leaves the trust between anniversaries. A trust worth less than the nil rate band at an anniversary pays nothing.

What tax do the trustees pay on income and gains?

On gov.uk's figures for 2026 to 2027, a discretionary trust pays income tax at 45 per cent on most income and 39.35 per cent on dividends, with the first £500 taxed at the standard rates and that band shared between the settlor's trusts. Income paid to a beneficiary carries a 45 per cent credit they can partly reclaim. Trustees pay capital gains tax at 24 per cent above an annual exempt amount of £1,500, or £3,000 where the beneficiary is vulnerable.

Is a letter of wishes legally binding?

No, and it should not be. The letter tells the trustees how the person who made the will would like their discretion to be used, and a trustee who departs from it needs a good reason, but the decision remains the trustees'. A letter that bound them would give the beneficiaries rights the trust is designed to avoid. It is private, unlike the will, so it is the right place for anything about a beneficiary's circumstances that the family should not read at the Probate Registry.

Does a discretionary trust have to be registered with HMRC?

Usually. Gov.uk says an express trust must be registered on the Trust Registration Service within 90 days of being created or becoming liable to tax. A will trust that takes assets from the estate and is closed within two years of the death is exempt unless it incurs a tax liability. A discretionary trust that is to run on registers, and the trustees must update the register when the trustees or beneficiaries change and file the trust's tax returns each year.

Is there a better option for a disabled child?

Often, yes. A trust meeting section 89 of the Inheritance Tax Act 1984, under which capital and income can only be applied for the disabled person during their life apart from a small annual allowance, is outside the ten-year and exit charge regime. Gov.uk confirms there is no ten-yearly or exit charge while the assets stay in the trust for the beneficiary, and a vulnerable person election reduces income and capital gains tax to what the beneficiary would have paid personally, with a £3,000 exempt amount for gains.

Can the trustees just wind the trust up after I die?

Yes, and many do. Where the trustees appoint the fund out to beneficiaries within two years of the death, section 144 of the Inheritance Tax Act 1984 treats the gift as made by the will for inheritance tax, and a will trust closed within two years does not have to register unless it has a tax liability. A discretionary trust of residue used that way gives the family two years to divide the estate with hindsight, without a ten-year charge ever arising.

Sources & further reading

• Inheritance Tax Act 1984, section 64
• Inheritance Tax Act 1984, section 65
• Inheritance Tax Act 1984, section 66
• Inheritance Tax Act 1984, section 89
• GOV.UK: trusts and Income Tax
• GOV.UK: Capital Gains Tax rates
• GOV.UK: trusts for vulnerable people
• GOV.UK: register a trust as a trustee

This article is general information, not legal advice. The law changes and depends on your circumstances — always take advice on your specific situation before acting. Last reviewed 22 September 2026. AD Solicitors Limited is a recognised body regulated by the SRA (no. 8011228).