5. Trusts and Income Tax

Different types of trust income have different rates of Income Tax.

Read the overview for definitions of ‘trustee’, ‘settlor’ and ‘beneficiary’.

Accumulation or discretionary trusts

Trustees are responsible for paying tax on income received by accumulation or discretionary trusts. The first £1,000 is taxed at the standard rate.

If the settlor has more than one trust, this £1,000 is divided by the number of trusts they have. However, if the settlor has set up 5 or more trusts, the standard rate band for each trust is £200.

The tax rates are below.

Trust income up to £1,000

Type of income Tax rate
Dividend-type income 10%
All other income 20%

Trust income over £1,000

Type of income Tax rate
Dividend-type income 37.5%
All other income 45%

From 6 April 2013, Income Tax rates for accumulation or discretionary trust income over £1,000 went down to 37.5% for dividend-type income and 45% for other income.

Dividend tax credit

There’s a 10% tax credit on dividends from UK companies (and some non-UK companies) because the dividends come from profits on which the companies have already paid tax.

This means:

  • dividends that fall within the standard tax rate band won’t be taxed as the tax credit covers them
  • dividends above the standard rate band will be taxed on the trustees at 27.5%

Tax for this type of trust is complicated and the rates sometimes vary. There’s detailed guidance in HM Revenue and Customs (HMRC)’s ‘Trusts, Settlements and Estates’ manual.

Interest in possession trusts

The trustees are responsible for paying Income Tax at the rates below.

Type of income Income Tax rate
Dividend-type income 10%
All other income 20%

Sometimes the trustees ‘mandate’ income to the beneficiary. This means it goes to them directly instead of being passed through the trustees.

If this happens, the beneficiary needs to include this on their Self Assessment tax return and pay tax on it.

Bare trusts

If you’re the beneficiary of a bare trust you’re responsible for paying tax on income from it.

You need to tell HMRC about the income on a Self Assessment tax return.

Settlor-interested trusts

The settlor is responsible for Income Tax on these trusts, even if some of the income isn’t paid out to them. However, the Income Tax is paid by the trustees as they receive the income:

  1. The trustees pay Income Tax on the trust income by filling out a Trust and Estate Tax Return.

  2. They give the settlor a statement of all the income and the rates of tax charged on it.

  3. The settlor tells HMRC about the tax the trustees have paid on their behalf on a Self Assessment tax return.

The rate of Income Tax depends on what type of trust the settlor-interested trust is.

Other types of trust

There are special tax rules for parental trusts for children, trusts for vulnerable people and trusts where the trustees aren’t resident in the UK for tax purposes, called non-resident trusts.

If you’re the beneficiary

Depending on the type of trust and your income, you might be able to claim some of the Income Tax back.

If you’re the trustee

HMRC has detailed guidelines to help you complete the Trust and Estate Tax return.

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