Tax treatment of discretionary trusts

The use of discretionary trusts have declined in recent years because spouses and civil partnerships can now leave their nil rate band, that is their tax free amount, to each other tax efficiently. This is known as the transferable nil rate band.

That said, discretionary trusts are still the most flexible form of trust to provide for loved ones and continue to be popular tax planning vehicles providing the value of the assets held within the trust is a specified amount and/or attracts certain taxable reliefs such as business or agricultural property relief.

Discretionary trusts are taxed under a set of rules known as the relevant property regime. During the currency of the trust tax may arise when payments are made to beneficiaries and upon each 10 year anniversary of the trust. However, careful planning when setting up the trust can avoid such tax charges.

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