Discretionary will trust

What is a discretionary trust?

A discretionary trust - also referred to as a relevant property trust - is the most flexible sort of trust that you can create in your will but it also has the highest inheritance tax charge attached to it. You may be prepared to pay the extra tax in order to maintain flexibility and allow your trustees to distribute your estate depending on the particular circumstances of your beneficiaries when the time comes.

You can describe the beneficiaries of the trust either by name in your will or by a class of people (e.g. your children, your nephews and nieces). The trustees then have discretion as to how, when and for whose benefit to use some or all of the capital and income in the trust. You can, of course, leave your trustees guidance in a letter of wishes as to how you want them to use the assets but they will not be bound by your requests. That said, if you have chosen your executors and trustees carefully, they should follow your wishes.

Taxation of discretionary trusts

Discretionary trusts that are created by will are treated differently when it comes to inheritance tax. They are subject to what is known as the ‘relevant property charging regime’ which means that there is a charge to inheritance tax:

  • When assets enter the trust (40% charge, subject to available nil rate band).
  • On every ten-year anniversary of the trust (up to 6% of the value of the trust assets).
  • Every time assets are taken out of the trust and distributed to beneficiaries (up to 6% of the value of the trust assets).

An exception to this is that there is no inheritance tax charge if assets are distributed to beneficiaries from a discretionary will trust within two years of your death. Any distributions made within this time are treated as if they were made in your will. For example, it could be possible for trustees to create a bereaved minor’s trust (e.g. for your children) out of a discretionary trust and for that trust to have favourable inheritance tax treatment going forward. Specialist advice should be obtained if changes are proposed following your death.