Discretionary trusts and tax considerations

Posted on Oct 10, 2018

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If you’ve been asked to act as a trustee on a discretionary trust for the first time, it can feel rather daunting. You’re not only expected to make financial decisions for somebody else, but you may be asked to explain and justify those decisions.

Your responsibilities will include taking into account factors that may affect investment performance, such as tax and charges. But, don’t worry, in addition to guiding you through the process that will establish a suitable investment strategy, we’ll also help you work through the complex tax considerations.

The first thing to say is one tends to think of trusts as being the domain of very wealthy individuals – so you might think that you’ll never have to think about them. However, this isn’t necessarily the case. Discretionary trusts – where trustees can make certain decisions about how to use the trust income and the capital – could be set up to put assets aside for a future need. This could be a grandchild who might need more financial help at some point in their life, or beneficiaries who are not capable or responsible enough to deal with money themselves.

Our process with you will begin with a thorough review of the trust’s objectives, the trustees’ responsibilities and the beneficiaries’ requirements before making our recommendations for strategy and investments. After implementation, we will keep you informed of progress and, of course, work with the trustees who have a legal requirement to regularly review the trust and the suitability of its assets. Ongoing advice and reviews are therefore an integral part of our Trust Investment Service.

As mentioned above, trustees must take account of the tax treatment of the trust investments. Tax considerations will be covered in our advice – as discretionary trusts are potentially liable to the highest rates of tax and, without proper advice, it is easy to end up being asked to pay more tax than you need to. So, it’s important when setting up the trust that the correct tax wrapper is utilised as any tax due in relation to discretionary trusts, can fall on the trustees, the settlor (donor) or the beneficiary. A rate of 45% could be paid on certain income and getting this wrong would be costly.

There are a wide range of issues to think about when it comes to tax and discretionary trusts. It might be that, initially, you use a solicitor to assist with the legal matters, after which we would be delighted to help with the complex tax and wealth management – so do contact us on tel: 01892 500600 if you’ve got any questions.



Goodman Chartered Financial Planners is a trading name of Fairstone Financial Management Ltd. Fairstone Financial Management Ltd., is authorised and regulated by the Financial Conduct Authority – FRN: 475973 Registered in England and Wales no: 05574120. Part of the Fairstone Group. Where you have a complaint or dispute with us and we are unable to resolve this to your satisfaction then we are obliged to offer you the Financial Ombudsman Service to help resolve this. Please see the following link for further details: www.financial-ombudsman.org.uk.