Category: TRUSTS

Discretionary trusts are among the most flexible — and most misunderstood — structures in UK estate planning. Here’s what they do, what they cost, and the situations in which the complexity earns its keep.

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A discretionary trust is a legal arrangement in which assets are held by trustees for a defined class of beneficiaries — but with no individual beneficiary holding a fixed entitlement to any of the trust property or income. The trustees, exercising their judgement within the trust deed, decide who receives what, when, and on what conditions.

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That single feature — discretion in the hands of trustees rather than entitlement in the hands of beneficiaries — is what makes the structure both powerful and demanding. The question is rarely whether discretionary trusts are good or bad. The question is whether the family’s circumstances justify the structure.

What a Discretionary Trust Actually Does

Four functions sit at the heart of the structure.

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It separates ownership from benefit.

Assets belong to the trustees as legal owners, not to any beneficiary — the foundation of every other function the trust performs.

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It allows decisions to be made over time by people who know the circumstances.

The trustees can respond to events the settlor could not have predicted — divorce, business failure, vulnerability, and sudden need. Direct gifts cannot adapt. Trusts can.

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It enables planning across generations.

Assets can flow to children, grandchildren, and further, without each transfer triggering a fresh tax event.

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It provides a degree of asset protection.

Because beneficiaries hold no fixed entitlement, trust assets are not straightforwardly available to a beneficiary’s creditors, divorcing spouse, or means-tested benefit assessment.

The Tax Regime – The Part That Disqualifies Many Cases

Discretionary trusts have their own IHT regime. Three charges define the landscape.

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The entry charge.

Transferring assets into the trust during the settlor’s lifetime is a Chargeable Lifetime Transfer. An immediate 20% IHT charge applies to the value above the available nil-rate band (£325,000 per individual, minus any chargeable transfers made in the previous seven years).

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The 10-yearly periodic charge.

Every ten years from the trust’s establishment, a charge of up to 6% applies to the value above the nil-rate band.

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The exit charge.

When assets leave the trust to a beneficiary, a charge applies based on the value distributed and the time since the last 10-yearly anniversary.

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For a trust below the nil-rate band, these charges produce little or no tax. For a trust significantly above it, they need to be factored in—though the structure can still be advantageous, particularly where the alternative is assets sitting in an estate taxed at 40% on death.

When the Complexity Is Worth It Or Not

When it is worth it

Five situations recur in practice: vulnerable, young, or otherwise unprepared beneficiaries; beneficiaries whose circumstances are likely to change in ways the settlor cannot predict; meaningful risk of beneficiary insolvency or matrimonial claim; assets expected to grow significantly outside the estate; and qualifying business or agricultural property where the reliefs can be preserved within the trust.

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When it is not worth it

For modest estates within the nil-rate bands, the trust adds administrative burden without meaningful tax benefit. For families whose beneficiaries are competent adults in stable circumstances, the protection function may be unnecessary. For settlors not prepared to commit to ongoing administration, the structure degrades in practice.

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The trust is a tool, not a default.

Where This Leaves Things

A discretionary trust is not a document that runs itself. Annual trustee meetings, proper minuting, regular review of the investment position, attention to 10-yearly calculations, and timely tax returns are all required. None of this is onerous when built into a routine — but it becomes a problem when neglected for years and then needs reconstruction in a hurry.

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The right starting point is rarely “should we set up a trust.” It is “what is the family trying to achieve, and what is the best structure for those objectives.” The trust earns its place when the answer points to it. It loses its place when the answer points elsewhere and the trust is set up anyway because it was the tool the adviser knew best.

Wills, Tax & Trusts Ltd. advises on the design, establishment, and ongoing administration of discretionary and other trust structures, working alongside families and their professional advisers. Every trust is structured by a STEP-qualified practitioner and reviewed by a partner before release. If a discretionary trust is something you are considering, or have already established and want reviewed, we offer an initial conversation to assess what the structure should do — and whether it is doing it.

For families looking to hold and pass on substantial wealth across generations, the choice between a Family Investment Company and a trust shapes everything that follows. Here’s how the two structures compare — and how to think about which fits.

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For most of the twentieth century, the discretionary trust was the default structure for holding substantial family wealth. From the early 2000s – particularly after the 2006 reforms to the trust tax regime – a different structure has become increasingly common in advised cases: the Family Investment Company, or FIC.

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A FIC is a private limited company set up to hold family wealth. Shares are held by family members (or trusts for their benefit), and the company holds investments — typically shares, property, or other appreciating assets. The structure looks corporate; its function is dynastic.

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The choice between the two is not a choice between modern and old-fashioned. It is a choice between two genuinely different tools, each suited to different family circumstances.

How a FIC Actually Works

A FIC is a private limited company incorporated under standard UK company law, governed by its articles and a shareholders’ agreement that can be tailored in detail. The family typically funds the company by way of loan – repayable over time, rather than being a chargeable transfer for IHT.

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Shares can be structured in classes — voting, non-voting, income, growth — allowing founders to retain control while passing economic benefit to the next generation. Children and grandchildren receive growth shares that capture future appreciation outside the founders’ estates, while the founders retain authority through voting shares and directorships.

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Over time, as the loan is repaid and growth accumulates in the next generation’s shares, wealth transfers gradually and tax-efficiently – without the front-loaded charges that affect lifetime transfers into discretionary trusts.

The Key Differences

Control

In a FIC, founders retain meaningful control through shareholding and directorships even after substantial value has passed to the next generation. In a trust, the settlor typically gives up control at settlement.

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Tax Treatment

A FIC is taxed under corporation tax rules. A discretionary trust is taxed at trust rates on income and capital gains, with its own entry and periodic and exit IHT charges. For substantial wealth held over decades, the cumulative position can differ significantly.

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Flexibility for Circumstance

The trustees’ discretion to respond to unpredictable events is the trust’s defining strength. The FIC distributes according to shareholdings, not discretion – it is more predictable and less responsive.

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Privacy

A trust can be largely private. A FIC files public accounts at Companies House.

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Administrative Burden

Both structures require serious ongoing administration. Neither is light. The right question is not “which requires less work” but “which produces a workload the family is best equipped to sustain.”

Where Do Each Fit Better

FIC

Where founders want to retain control while passing economic benefit outwards. Where wealth is primarily investment-based and held long-term. Where the family is comfortable with corporate governance. Where the wealth involved justifies the running costs. The family gradually brings the next generation into the management of family wealth through shareholding and eventual directorship.

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Trust

Where beneficiaries are vulnerable, young, or in unstable circumstances. Where flexibility to respond to unpredictable events matters. Where privacy is a priority. Where qualifying business or agricultural property is involved — particularly post-April 2026. Where the family’s circumstances are likely to involve significant intra-family disagreement, and the trustees’ independent judgment can hold the structure together.

Hybrid Structures

In many advised cases, the answer is not “FIC or trust” but “both”. A FIC can be owned, in part, by a discretionary trust—combining corporate efficiency at the asset level with trust protection and flexibility at the shareholding level. These structures are more complex to design and administer and require advisers comfortable across company law, trust law, and tax. For families whose wealth justifies the complexity, the combined approach often produces outcomes neither tool achieves alone.

Where This Leaves Things

The wrong question is “which structure is best.” The right question is “which structure best fits the family we actually are, the wealth we actually hold, and the future we actually intend to build.” The answer earns its place when the analysis points to it. It loses its place when the structure is chosen for fashion, adviser preference, or imitation of what other families have done.

Wills, Tax & Trusts Ltd. advises families and their professional advisers on the design and selection of long-term wealth-holding structures, including Family Investment Companies, trusts, and hybrid arrangements. Every structure is designed by a STEP-qualified practitioner and reviewed by a partner before release. If you are considering how to hold family wealth for the long term, or reviewing a structure already in place, we offer an initial conversation to scope what is right for your circumstances.