What is a discretionary trust?
A discretionary trust gives trustees the power to decide which beneficiaries within a defined class receive income or capital, how much, and when. No beneficiary has an automatic right to anything, which makes the trust flexible where circumstances may change.
That flexibility is what makes it useful: the class can include people not yet born, trustees can respond to a beneficiary's divorce, bankruptcy or addiction, and nothing has to be decided at the point the trust is made.
It is the most heavily taxed structure. Transfers in above the available nil rate band are chargeable immediately, there is a periodic charge of up to 6% every ten years, and exit charges apply when capital leaves. Trust income is taxed at the highest rates.
Because trustees have discretion and no instructions, a letter of wishes is not optional in practice — it is the only guidance they have. Registration on the Trust Registration Service is generally required.