A discretionary trust is a legal arrangement that appears in many wills. If you are acting as an executor or administrator, finding one in the estate you are managing raises immediate questions about tax, paperwork, and what happens next. This article explains what a discretionary trust is, how it affects the probate process, and why getting professional advice early matters.
What is a discretionary trust?
A discretionary trust is an arrangement where assets or money are set aside and placed under the control of trustees, to be used for the benefit of a group of people (the “beneficiaries”). Where the trust is created by a will, the person who made the will is the testator, and it is their will that settles the assets, so they are also the settlor of the trust. The defining feature is that no single beneficiary has an automatic right to any of the assets or income. The trustees decide who receives what, when, and how much.
For example, a will might say:
“I leave £100,000 in trust for my grandchildren, at the discretion of my trustees.”
That means the trustees can distribute funds unevenly, delay payments, or favour one beneficiary over another, based on what they judge to be best at the time. Many testators also leave a “letter of wishes” to guide the trustees, but this document is not legally binding.
Discretionary trusts are commonly used when:
- Beneficiaries are young or not yet financially independent.
- The settlor wants to protect assets against a beneficiary’s divorce or bankruptcy.
- There is a vulnerable or disabled beneficiary.
- The family structure is complex, for example involving stepchildren or second marriages.
- Flexibility is needed for future changes, such as more grandchildren being born.
How does a discretionary trust affect probate?
Finding a discretionary trust in a will does not prevent probate from taking place. It does, however, make the process more involved. Here is why.
Additional paperwork and legal responsibilities
The executor of the estate may also be appointed as a trustee, or may need to appoint one separately. Trustees must set up and run the trust, keep accurate records, manage the funds, and report to HMRC. That is a significant ongoing responsibility, separate from the role of executor.
Valuing and separating trust assets
The assets destined for the discretionary trust must be identified, valued, and separated from the rest of the estate. This can delay distributions to other beneficiaries, particularly where the trust holds property, business interests, or investments requiring specialist valuation.
Inheritance tax implications
This is the area where complexity increases most sharply. The inheritance tax (IHT) rules that apply to discretionary trusts are detailed and, in some cases, overlap with broader changes to IHT introduced in recent years. Professional advice from a trusts and probate solicitor is strongly recommended.
Discretionary trusts and inheritance tax
Discretionary trusts fall under what HMRC calls the “relevant property” regime. The inheritance tax rules that apply depend on whether the trust was set up during the settlor’s lifetime or created by their will.
If the trust is set up during the settlor’s lifetime
Transfers into a discretionary trust made during a person’s lifetime are known as “chargeable lifetime transfers” (CLTs). Any amount above the available nil-rate band can be taxed at 20% at the time the trust is created. If the settlor then dies within seven years, the rate may rise to 40%, with credit for the 20% already paid.
The nil-rate band remains frozen at £325,000 until April 2031. This freeze, combined with rising asset values, means more estates now cross the threshold than in previous years.
If the trust is set up in a will
There is no 20% entry charge where assets pass into a discretionary trust on death. However, the value of the trust still forms part of the estate for IHT purposes. If the total estate (including trust assets) exceeds the nil-rate band, IHT is due at 40% on the excess.
Two qualifications matter here. The standard nil-rate band is £325,000, but the band actually available to an estate can be higher where a transferable nil-rate band is claimed from a spouse or civil partner who died first, which can take it to £650,000. And although a property passing into a discretionary trust does not attract the residence nil-rate band (see below), that does not stop the residence nil-rate band applying to a different qualifying property interest in the same estate.
Ongoing charges after the trust is set up
Discretionary trusts face a “periodic charge” of up to 6% every ten years on the value above the nil-rate band, and there may be an “exit charge” of up to 6% when assets leave the trust between those anniversaries. In practice, the actual rate charged may be lower, depending on the trust’s history. However, the calculation can be complex and usually requires professional input.
The residence nil-rate band and discretionary trusts
One important point that executors frequently overlook: the residence nil-rate band (RNRB) is not available when a property is left to a discretionary trust, because the eventual destination of the property is at the trustees’ discretion, even if the potential beneficiaries are children or grandchildren. The RNRB is currently £175,000 per person, so losing it has a real financial impact.
There is, however, a remedy available in some cases. Under section 144 of the Inheritance Tax Act 1984, if the trustees appoint the trust assets out within two years of the death, the appointment is read back into the will and treated for IHT purposes as if the deceased had left the assets that way from the outset. Where the appointment is to a direct descendant, the RNRB can then be claimed.
The detail matters. Reading back only helps if the appointment gives the descendant an absolute interest or another qualifying interest, so an appointment on a contingency such as reaching an age above 18 will not do it. This is a technical area and requires careful advice.
Nil-rate band discretionary trusts in older wills
In the past, couples sometimes used nil-rate band discretionary trusts in their wills so the allowance of the first spouse was not wasted. Since October 2007, spouses and civil partners have been able to transfer any unused nil-rate band to the surviving spouse’s estate, so this type of trust is no longer needed for that purpose.
Two points about the transfer are worth being precise on, because they are widely misstated. It is not automatic: the executors have to claim it, on form IHT402 alongside an IHT400, or on the probate application itself for an excepted estate, within two years of the end of the month in which the second person died. And the qualifying date works by reference to the survivor’s death rather than the first: the transfer is available where the survivor died on or after 9 October 2007, whenever the first spouse died. Older wills that still contain nil-rate band trusts may need reviewing by a solicitor to establish whether the trust structure remains appropriate.
Upcoming changes: pensions and IHT from 6 April 2027
Executors dealing with estates that include pension funds should also be aware of an important change on the horizon. At present, unused pension funds and death benefits held under discretionary pension schemes do not form part of the deceased’s estate for IHT purposes. That exemption ends on 6 April 2027, when most unused pension funds and death benefits will be included in a person’s estate and potentially subject to inheritance tax at 40%. If the estate you are administering involves a pension, take specialist advice now rather than waiting.
Common problems with discretionary trusts during probate
Several issues come up regularly when a discretionary trust is involved.
Delays to the rest of the estate
Until the trust is properly established and its tax position clarified, distributions to other beneficiaries may be held up. This can cause frustration, particularly for beneficiaries who are not part of the trust.
Trustees who do not know they are trustees
Lay executors may not realise they have also taken on trustee duties, or may not understand what those duties involve. Trustees have ongoing legal obligations that extend well beyond the probate process itself.
Inheritance tax calculation errors
If the nil-rate band has been partly used by earlier lifetime gifts, or if the trust holds business or agricultural assets subject to the reliefs that changed in April 2026, the IHT calculation becomes significantly more complex. Errors can result in penalties or disputes with HMRC.
Missing documentation in older wills
Wills drafted many years ago may not include a letter of wishes or any clear guidance for the trustees. Without this, trustees may find it hard to exercise their discretion in a way that reflects the deceased’s intentions.
Disputes between beneficiaries
Because no beneficiary has an automatic entitlement, a discretionary trust can sometimes generate conflict. If one beneficiary believes they have been overlooked or treated unfairly, this can lead to legal challenge.
Why professional help matters with a discretionary trust
A discretionary trust is not something to handle without expert guidance. The tax rules in England and Wales are detailed, recent changes have added further layers of complexity, and mistakes can have long-lasting financial consequences for the estate and its beneficiaries.
A specialist trusts and probate solicitor can help you confirm whether a discretionary trust has been created, interpret the wording of the will, advise on IHT implications (including the residence nil-rate band and any relevant business or agricultural property relief), ensure the trust is correctly set up and reported to HMRC, and help you keep the records you will need for future periodic charges.
Get expert help with a discretionary trust
The Probate Network connects executors and families with experienced probate professionals who understand trust law and inheritance tax. They can explain what needs to happen and guide you through each step.
Request a quote from The Probate Network today to get clear, expert support for even the most complex estates.
You may also wish to read:
- The Will Trust
- What is a Trustee in a Will
- What is a Life Interest Trust
- What is a Bare Trust
- What is a Property Protection Trust
- When Property is Left in a Trust in a Will
Frequently asked questions
Does a discretionary trust avoid inheritance tax?
Not automatically. Assets placed into a discretionary trust during a person’s lifetime may attract a 20% entry charge above the available nil-rate band. Assets passing into a trust on death form part of the estate for IHT purposes and may be taxed at 40% on the amount above the available threshold. Once set up, the trust also faces periodic charges of up to 6% every ten years, and exit charges when assets are paid out to beneficiaries. A discretionary trust can form part of a wider IHT strategy, but it does not remove the tax liability on its own.
Can a discretionary trust hold the family home?
Yes, but there is an important tax consequence. If a property passes into a discretionary trust on death rather than directly to a child or grandchild, the estate will not qualify for the residence nil-rate band (currently £175,000) on that property. This means a potentially significant loss of IHT relief. Trustees can remedy this in some cases by appointing the property out to a direct descendant absolutely within two years of death, which is read back into the will under section 144 of the Inheritance Tax Act 1984 and allows the residence nil-rate band to apply. An appointment that is contingent on the descendant reaching an age above 18 will not achieve it. Always take professional advice before including a family home in a discretionary trust.
What is the difference between a trustee and an executor?
An executor is appointed to administer the estate of the person who died: gathering assets, paying debts, obtaining probate, and distributing what remains. A trustee is responsible for managing a trust, which may continue for many years after probate is complete. The same person can hold both roles, and often does when a will contains a discretionary trust. However, the duties are distinct, and a trustee takes on ongoing legal and reporting obligations that go well beyond the probate process.
Do discretionary trusts still make sense after recent tax changes?
They can, but the landscape has shifted. The nil-rate band remains frozen at £325,000 until April 2031, meaning more estates are caught by IHT as asset values rise. From 6 April 2026, Business Property Relief and Agricultural Property Relief give 100% relief only on the first £2.5 million of combined qualifying property per person, with relief dropping to 50% above that rather than disappearing, so the excess is effectively taxed at 20%. The £2.5 million allowance is transferable between spouses and civil partners, giving a couple up to £5 million. From 6 April 2027, most unused pension funds will also fall within the IHT net, which may alter how some discretionary trust structures perform. Whether a discretionary trust remains the right vehicle for a particular estate depends on its specific circumstances. Speak to a qualified solicitor or tax adviser for guidance tailored to your situation.
This article is for general guidance only and does not constitute legal, tax or financial advice. Rules and thresholds can change and every estate is different. For advice on your own circumstances, speak to a qualified professional. You can book a free legal consultation through The Probate Network.
