How To Set Up a Discretionary Trust for Your Business in the UK

Thinking about using a trust to hold business assets, shares or profits? A discretionary trust can be a flexible way to protect value, plan succession and manage tax - but getting the structure and documents right from day one is crucial.

In this guide, we break down what a discretionary trust is in plain English, when it makes sense for a small business, and the practical steps to set one up under UK law. We’ll also cover the key documents, tax points, and ongoing compliance so you can move forward confidently.

What Is A Discretionary Trust For UK Businesses?

A discretionary trust is a legal arrangement where you (or your company) transfer assets to trustees, to hold and manage for a class of beneficiaries. “Discretionary” means the trustees decide who benefits, when, and in what amounts (within the rules in the trust deed). There’s no fixed entitlement for any beneficiary.

For small businesses, typical assets placed into a discretionary trust include company shares, intellectual property, real estate used by the business, or an investment portfolio earmarked for future growth or family succession. The goal is usually to protect assets, separate ownership from day-to-day control, and give flexibility when distributing income or capital.

If you’re new to trusts generally, it’s worth grounding yourself in the basics of trusts and how a discretionary trust compares with fixed or bare trusts. For a deeper dive into the differences, see this plain-English explainer on discretionary trusts.

At a high level, the key players are:

• Settlor: the person who establishes (or “settles”) the trust, typically by making a nominal initial gift to the trustees.
• Trustees: the legal owners who manage the trust assets and exercise their discretion for beneficiaries, following the trust deed and their fiduciary duties.
• Beneficiaries: the people or entities who may benefit from trust income or capital (e.g. founders’ family members, a holding company, or a charity if allowed).
• Protector (optional): a person who can approve certain trustee decisions or remove/appoint trustees, adding an extra layer of oversight.

Trustees must act in good faith, for proper purposes, and in accordance with the Trustee Act 2000 and the terms of the trust deed. Where the trust holds land, the Trusts of Land and Appointment of Trustees Act 1996 can also be relevant. If your trust will control a company (for example, by holding a majority of voting shares), be mindful of the rules on People with Significant Control - a trust-related controller may need to be disclosed on the company’s PSC register.

Should A Small Business Use A Discretionary Trust?

Discretionary trusts aren’t just for high-net-worth families - they’re commonly used by SMEs and founders who want flexibility and protection. Here are situations where they can be a strong fit:

• Asset protection and ring-fencing: holding core assets (like IP or property) in a trust can help ring-fence value from trading risks, provided it’s structured properly and not done to defeat creditors.
• Succession planning: trustees can keep operating continuity if a founder retires or passes away, while beneficiaries receive distributions over time, guided by a letter of wishes.
• Income distribution flexibility: trustees can adjust who receives income year-to-year, which can be helpful for family planning within the confines of tax law.
• Long-term stewardship: you can embed guiding principles in the trust deed or letter of wishes, shaping how the business is grown and profits are reinvested.

There are also drawbacks to weigh up:

• Complexity and cost: trusts involve careful drafting, professional advice, and ongoing admin. This isn’t a DIY exercise.
• Tax rules are nuanced: anti-avoidance rules, relevant property charges (for IHT), and income/capital gains tax treatment all need early planning.
• Loss of personal control: once assets are transferred, trustees are the legal owners. Even if you’re a trustee, you must act for the class of beneficiaries, not yourself.

Trusts are one tool among many. Before you settle on a structure, compare it with other options - for example, using a holding company within a group company structure, or simply retaining assets in your trading company with strong contracts and insurance. If you’re at the business formation stage, it can also help to revisit your business structure decision in parallel.

How To Set Up A Discretionary Trust (Step-By-Step)

The exact process depends on your goals and assets. As a general roadmap:

1) Define Your Purpose And Beneficiaries

Be clear about why you’re using a trust. Asset protection? Family succession? Holding company shares? List the potential beneficiaries (e.g. spouse/children, future grandchildren, charitable causes, or a corporate beneficiary) and any exclusions. Consider any risks of conflicts if trustees or beneficiaries are also directors or employees of the business.

2) Choose Trustees And An Optional Protector

Pick trustees who are competent, trustworthy, and available - often a mix of individuals and a professional trustee. Consider whether you will serve as a trustee and what safeguards (e.g. a protector) you want in place. Trustees must understand their fiduciary duties and the investment standard of care under the Trustee Act 2000.

3) Draft The Trust Deed (And Letter Of Wishes)

The trust deed is the backbone of your arrangement. It sets out trustee powers, who can benefit, how discretion is exercised, how new trustees are appointed, and how the trust ends. A non-binding letter of wishes can guide trustees on how you’d like them to exercise their powers over time. Because the deed must be tailored to your assets and objectives, get it professionally drafted. For execution details, brush up on executing deeds and the formalities for witnessing deeds in England and Wales (or your local jurisdiction’s rules).

4) Decide What Assets To Transfer

Work with your accountant and lawyer to decide which assets should move into the trust and when. If you’re transferring shares in a limited company, think through shareholder rights, any consents required under your Articles, and whether you also need to update or put in place a Shareholders Agreement to align governance and exit provisions with the new ownership structure.

5) Approve And Document Corporate Steps

If company shares are involved, the company’s board may need to approve the transfer, and you should record decisions with compliant board resolutions. Check pre-emption rights and transfer restrictions in the Articles and any existing shareholder arrangements. Where necessary, use proper share transfer documents and update the register of members.

6) Execute The Deed And Transfer Assets

Execute the trust deed as a deed, with required signatures and witnesses, and then transfer legal title to the trustees (e.g. updating the company’s share register or Land Registry if property is involved). If you’re relying on remote signings, confirm whether the method is acceptable - for some situations, see the guidance on electronic witnessing.

7) Register The Trust (If Required)

Most UK trusts now need to register with HMRC’s Trust Registration Service (TRS) under the Money Laundering Regulations 2017 (as amended). Registration is mandatory for most express trusts, whether taxable or not, unless an exemption applies. Keep a note of deadlines and information required (trustee/beneficiary details, assets, etc.).

8) Put Governance And Risk Controls In Place

Agree internal processes for trustee meetings, decisions and record-keeping. If the trust holds shares in your trading company, align these with company governance (e.g. Articles, shareholder voting). Consider policies to manage conflicts (e.g. where a trustee is also a company director) and maintain minutes and distribution resolutions.

What Documents Will You Need?

Your exact pack will depend on your aims and assets, but most small business trusts will require:

• Trust Deed: bespoke, professionally drafted with clear discretionary powers, appointment/removal of trustees, and winding-up provisions.
• Letter of Wishes: non-binding guidance to trustees on how to exercise discretion.
• Trustee Resolutions and Minutes: to approve acceptances, investments, distributions, and key decisions.
• Asset Transfer Documents: e.g. stock transfer forms for shares, assignments for IP, or TR1 for property transfers.
• Company Approvals: board and shareholder approvals, plus updates to statutory registers where shares are transferred.
• Tax Registrations and TRS Information: to register the trust and handle ongoing returns if applicable.

Transferring company shares? Plan ahead for either Stamp Duty or Stamp Duty Reserve Tax (SDRT) and filing steps. For an overview of costs and triggers, see the breakdown of Stamp Duty on Shares.

If contracts, IP or other intangible rights are being moved into the trust, ensure assignments and licences are drafted correctly. Don’t rely on generic templates - this is a classic area where bespoke drafting prevents expensive fixes later.

Tax, Reporting And Ongoing Compliance

Tax treatment depends on what the trust owns, how income is distributed, and anti-avoidance rules. Always get tailored tax advice alongside legal advice. At a high level, be aware of:

• Income Tax: trustees may be liable at trust rates where income isn’t mandated to beneficiaries; distributions to beneficiaries are taxable in their hands. Discretion must be exercised with tax in mind.
• Capital Gains Tax (CGT): disposals by trustees can trigger CGT; holdover relief may be available on certain transfers into or out of the trust if conditions are met.
• Inheritance Tax (IHT): most discretionary trusts are within the “relevant property” regime under the Inheritance Tax Act 1984, which can involve entry, periodic (10-year), and exit charges.
• Stamp Taxes: share or property transfers into the trust can trigger Stamp Duty, SDRT or SDLT depending on the asset and consideration.
• TRS: maintain up-to-date records and notify changes. Late or non-registration can lead to penalties.

Trustees also carry compliance duties beyond tax. They must keep trust accounts and records, act prudently with investments, and avoid conflicts. Where the trust controls a company, corporate filings must remain accurate - including PSC information if the trust’s arrangements give significant influence or control.

If the trust will receive dividends from a trading company, consider whether corporate policies or a Shareholders Agreement should define dividend policy, director appointments, and exit scenarios (drag-along/tag-along) to reduce uncertainty for trustees.

Common Use Cases And Alternatives For SMEs

Here are practical ways UK small businesses use discretionary trusts - and what to consider:

Holding Company Shares For Family Succession

Placing founder shares into a discretionary trust allows trustees to hold, vote and receive dividends while distributing benefits to family members over time. Make sure your company governance is aligned and that any transfers are properly documented with share transfer forms and board approvals.

Ring-Fencing Intellectual Property

Some owners house core IP (trademarks, copyrights or patents) in a trust that licenses IP to the trading company. This can add a protective layer, but IP assignments and licences must be watertight to avoid undermining protection or creating tax leakage.

Business Property Held For The Trading Company’s Use

The trust owns premises which are then leased to the operating company. This can separate property risk and provide steady trust income. Confirm SDLT, VAT options (if any), and ensure lease terms are arm’s length and clearly documented.

Alternatives To Consider

Before committing to a trust, sense-check whether a corporate holding company, insurance and robust contracts could meet your goals with less complexity. In some cases, adopting or revising a Shareholders Agreement and updating your Articles can deliver the governance and exit protections you need without a trust structure.

If you’re leaning towards a trust, it’s helpful to map out the steps in detail. For a process-focused overview written for owners, see this companion piece on setting up a discretionary trust and use it alongside your tax and legal advice.

Key Takeaways

• A discretionary trust lets trustees decide how and when to distribute business income or capital, offering flexibility for asset protection and succession - but it must be carefully drafted and administered.
• Agree your purpose, beneficiaries and governance upfront, then appoint capable trustees (and an optional protector) who understand their fiduciary duties and the Trustee Act 2000 investment standard.
• The trust deed is critical. Execute it as a deed and follow formalities for signatures and witnesses; see the guidance on executing deeds and witnessing deeds.
• When moving company shares, record proper corporate approvals and board resolutions, use valid share transfers, update registers, and check stamp taxes triggered on transfer (see Stamp Duty on Shares).
• Register with HMRC’s Trust Registration Service if required, keep trust and tax records tight, and monitor PSC disclosure if the trust effectively controls your company.
• Tax on discretionary trusts is nuanced (income tax, CGT, IHT relevant property charges), so coordinate legal and tax advice before transferring assets.
• It can be overwhelming to piece everything together alone - getting a tailored strategy and professionally drafted documents will protect your business from day one.

If you’d like help to set up a discretionary trust for your business - from drafting the trust deed to documenting share transfers and board approvals - you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.