A trust is a way of managing assets (money, investments, land or buildings) for people. There are different types of trusts and they are taxed differently.

Trusts involve:

• the 'settlor' - the person who puts assets into a trust
• the 'trustee' - the person who manages the trust
• the 'beneficiary' - the person who benefits from the trust

What trusts are for

Trusts are set up for a number of reasons, including:

• to control and protect family assets
• when someone’s too young to handle their affairs
• when someone can’t handle their affairs because they’re incapacitated
• to pass on assets while you’re still alive
• to pass on assets when you die (a ‘will trust’)
• under the rules of inheritance if someone dies without a will (in England and Wales)

What the settlor does

The settlor decides how the assets in a trust should be used - this is usually set out in a document called the ‘trust deed’.

Sometimes the settlor can also benefit from the assets in a trust - this is called a ‘settlor-interested’ trust and has special tax rules. Find out more by reading the information on different types of trust.

What trustees do

The trustees are the legal owners of the assets held in a trust. Their role is to:

• deal with the assets according the settlor's wishes, as set out in the trust deed or their will
• manage the trust on a day-to-day basis and pay any tax due
• decide how to invest or use the trust’s assets

If the trustees change, the trust can still continue, but there always has to be at least 1 trustee.

Beneficiaries

There might be more than 1 beneficiary, like a whole family or defined group of people. They may benefit from:

• the income of a trust only - eg from renting out a house held in a trust
• the capital only - eg getting shares held in a trust when they reach a certain age
• both the income and capital of the trust

The main types of trust are listed below - they’re all taxed differently.

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

Bare trusts

Assets in a bare trust are held in the name of a trustee. However, the beneficiary has the right to all of the capital and income of the trust at any time if they’re 18 or over (in England and Wales), or 16 or over (in Scotland). This means the assets set aside by the settlor will always go directly to the intended beneficiary.

Bare trusts are often used to pass assets to young people - the trustees look after them until the beneficiary is old enough.

Example:

Gary leaves his sister Juliet some money in his will. The money is held in trust.

As the beneficiary Juliet is entitled to the money and any income (eg interest) it earns. She can also take possession of any of the money at any time.

Interest in possession trusts

These are trusts where the trustee must pass on all trust income to the beneficiary as it arises (less any expenses).

Example:

Stanley creates a trust for all the shares he owned.

The terms of the trust say that when he dies, the income from those shares goes to his wife for the rest of her life. When she dies, the shares will pass to their children.

Stanley’s wife is the income beneficiary and has an ‘interest in possession’ in the trust. She doesn’t have a right to the shares themselves.

Discretionary trusts

These are where the trustees can make certain decisions about how to use the trust income, and sometimes the capital.

Depending on the trust deed, trustees can decide:

• what gets paid out (income or capital)
• which beneficiary to make payments to
• how often payments are made
• any conditions to impose on the beneficiaries

Discretionary trusts are sometimes set up to put assets aside for:

• a future need, like a grandchild who may need more financial help than other beneficiaries at some point in their life
• beneficiaries who aren’t capable or responsible enough to deal with money themselves

Accumulation trusts

This is where the trustees can accumulate income within the trust and add it to the trust’s capital. They may also be able to pay income out, as with discretionary trusts.

Mixed trusts

These are a combination of more than one type of trust. The different parts of the trust are treated according to the tax rules that apply to each part.

Settlor-interested trusts

These are where the settlor or their spouse or civil partner benefits from the trust. The trust could be:

• an interest in possession trust
• an accumulation trust
• a discretionary trust

Example:

Dave can no longer work due to illness. He sets up a discretionary trust to make sure he has money in the future and puts some of his money in it.

He’s the settlor, but he may also benefit from the trust because the trustees can make payments to him.

Non-resident trusts

This is a trust where the trustees aren’t resident in the UK for tax purposes. The tax rules for this type of trust are very complicated - there’s detailed guidance on non-resident trusts on the HM Revenue and Customs (HMRC) website.

These are trusts set up by parents for children under 18 who have never been married or in a civil partnership. They’re not a type of trust in their own right but will be one of the following:

• a bare trust
• an interest in possession trust
• an accumulation trust
• a discretionary trust

Read the information on types of trust to find out more about these.

Income Tax

Income Tax on income from the trust is paid by the trustees - but the settlor is responsible for it. This means:

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 HM Revenue and Customs (HMRC) about the tax the trustees have paid on their behalf when filling out their Self Assessment tax return.

Some trusts for disabled people or children get special tax treatment. These are called ‘trusts for vulnerable beneficiaries’.

Who qualifies as a vulnerable beneficiary

A vulnerable beneficiary is either:

• someone who’s mentally or physically disabled
• someone under 18 whose parent has died

Trusts that qualify for special tax treatment

A trust doesn’t qualify for special Income Tax treatment if the person setting it up can benefit from the trust income. However, from 2008 to 2009 it would qualify for special Capital Gains Tax treatment.

Trusts for children who’ve lost a parent are usually set up by the parent’s will, or by special rules of inheritance if there’s no will.

If someone dies without a will in Scotland, a trust set up there for their children is usually treated as a bare trust for tax purposes.

If there’s more than 1 beneficiary

If there are beneficiaries who aren’t vulnerable, the assets and income for the vulnerable beneficiary must be:

• identified and kept separate
• used only for that person

Only that part of the trust gets special tax treatment.

Claiming special tax treatment

To claim special treatment for Income Tax and Capital Gains Tax, the trustees have to fill in the ‘Vulnerable Person Election’ form on the HM Revenue and Customs (HMRC) website.

If there’s more than 1 vulnerable beneficiary, each needs a separate form.

The trustees and beneficiary must both sign the form.

If the vulnerable person dies or is no longer vulnerable, the trustees must tell HMRC:

HMRC Trusts and Deceased Estates Helpline
Telephone: 0300 123 1071
Find out about call charges

Income Tax

In a trust with a vulnerable beneficiary, the trustees are entitled to a deduction of Income Tax. It’s calculated like this:

1. Trustees work out what their trust Income Tax would be if there was no claim for special treatment - this will vary according to which type of trust it is.

2. They then work out what Income Tax the vulnerable person would have paid if the trust income had been paid directly to them as an individual.

3. They can then claim the difference between these 2 figures as a deduction from their own Income Tax liability.

This is a complicated calculation but there’s a detailed worked example on the HMRC website.

Capital Gains Tax

Capital Gains Tax may be due if assets are sold, given away, exchanged or transferred in another way and they've gone up in value since being put into trust.

Tax is only paid by trustees if the assets have increased in value above the ‘annual exempt amount’, which is an allowance of £11,000 for vulnerable people or £5,500 for others.

Trustees are responsible for paying any Capital Gains Tax due. If the trust is for vulnerable people, trustees can claim a reduction, which is calculated like this:

1. They work out what they would pay if there was no reduction.

2. They then work out what the beneficiary would have to pay if the gains had come directly to them.

3. They can claim the difference between these two amounts as a reduction on what they have to pay in Capital Gains Tax using form SA905 on the HMRC website.

This special Capital Gains Tax treatment doesn't apply in the tax year when the beneficiary dies.

Inheritance Tax

These are the situations when trusts for vulnerable people get special Inheritance Tax treatment:

• for a disabled person - at least half of the payments from the trust must go to the disabled person during their lifetime
• someone suffering from a condition that's expected to make them disabled sets up a trust for themselves
• for a bereaved minor - they must take all the assets and income at (or before becoming) 18

There’s no Inheritance Tax charge:

• if the person who set up the trust survives 7 years from the date they set it up
• on transfers made out of a trust to a vulnerable beneficiary

When the beneficiary dies, any assets held in the trust on their behalf are treated as part of their estate and Inheritance Tax may be charged.

Trusts usually have 10-year Inheritance Tax charges, but trusts with vulnerable beneficiaries are exempt.

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

Trust income over £1,000

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.

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.

Capital Gains Tax is a tax on the profit when you sell, give away, exchange or transfer something (an 'asset') that has increased in value.

It's the gain you make that's taxed, not the amount of money you receive.

For trusts there’s an annual tax-free allowance of £5,500, or £11,000 if the beneficiary is a vulnerable person. This means trustees only pay tax if the increase in value is more than this amount. If there’s more than 1 beneficiary, the higher allowance may apply even if only 1 of them is vulnerable.

For trustees, the rate of Capital Gains Tax is 28% - but they might be able to reduce this if they qualify for Entrepreneurs’ Relief.

Trustees calculate their Capital Gains Tax in the same way as everyone else.

If trustees aren't resident in the UK for tax purposes, they might not have to pay Capital Gains Tax. Read detailed guidance on non-resident trusts on the HM Revenue and Customs (HMRC) website.

When Capital Gains Tax is due

Assets are transferred into a trust

In this situation, the person who makes the transfer (the settlor) pays.

There’s one exception - the settlor can ask for the tax to be postponed (this is called ‘Hold-Over Relief’) until the trustees sell or transfer the asset.

Trustees may be able to claim Hold-Over Relief again when they sell or transfer the asset. The rules are complicated, but there’s a leaflet to help you.

Download 'Relief for gifts' helpsheet (PDF, 127KB)

Assets are transfered from a trust

The trustees pay the tax unless the trust is a bare trust. In this case, if the trustees transfer assets to the beneficiary there’s nothing to pay. If the trustees sell or otherwise transfer assets on behalf of the beneficiary, the beneficiary pays.

For more on bare trusts, read the information about the different types of trust.

Trustees are no longer resident in the UK

If the trustees change and the new trustees aren’t resident in the UK, they pay Capital Gains Tax based on the market value of the assets in the trust immediately before the trust became non-resident.

A beneficiary gets some or all of the assets in a trust

This is when the beneficiary becomes ‘absolutely entitled’, which means they can tell the trustees what to do with the assets (eg when they reach a certain age and the trust ends).

The trustees pay Capital Gains Tax based on the market value of the assets on the date the beneficiary becomes entitled. Trustees calculate their Capital Gains Tax in the same way as everyone else.

When Capital Gains Tax isn’t due

Sometimes an asset might be transferred to someone else, but tax isn’t payable. This happens when:

• someone dies and leaves their assets to a trust
• someone dies and an ‘interest in possession’ comes to an end (this happens in interest in possession trusts - for more information, read about the different types of trust)

Paying Capital Gains Tax

If you’re the trustee, you pay via the Trust and Estate Tax Return. If you’re the beneficiary, you pay via Self Assessment.

If you need more help

HMRC has a leaflet to explain in more detail how trusts are treated for Capital Gains Tax.

Download 'Trusts and Capital Gains Tax' leaflet (PDF, 97KB)

You can also contact HMRC:

HMRC Trusts and Deceased Estates Helpline
Telephone: 0300 123 1071
Find out about call charges

Inheritance Tax may have to be paid on a person’s estate (their money and possessions) when they die. It’s only due if the estate is worth more than the threshold of £325,000.

Inheritance Tax is due at 40% on anything above the threshold of £325,000 - but there's a reduced rate of 36% if the person's will leaves more than 10% of their estate to charity.

Inheritance Tax can also apply when you’re alive if you transfer some of your estate into a trust.

When Inheritance Tax is due

The main situations when Inheritance Tax is due are:

• when assets are transferred into a trust
• when a trust reaches a 10-year anniversary of when it was set up (there are 10-yearly Inheritance Tax charges)
• when assets are transferred out of a trust (known as ‘exit charges’) or the trust ends
• when someone dies and a trust is involved when sorting out their estate

What you pay Inheritance Tax on

You pay Inheritance Tax on ‘relevant property’ - assets like money, shares, houses or land. This includes the assets in most trusts.

There are some occasions where you may not have to pay Inheritance Tax - for example where the trust contains excluded property.

Special rules

Some types of trust are treated differently for Inheritance Tax purposes.

Bare trusts

These are where the assets in a trust are held in the name of a trustee but go directly to the beneficiary, who has a right to both the assets and income of the trust.

Transfers into a bare trust may also be exempt from Inheritance Tax, as long as the person making the transfer survives for 7 years after making the transfer.

Interest in possession trusts

These are trusts where the beneficiary is entitled to trust income as it’s produced - this is called their ‘interest in possession’.

On assets transferred into this type of trust before 22 March 2006, there’s no Inheritance Tax to pay.

On assets transferred on or after 22 March 2006, the 10-yearly Inheritance Tax charge may be due.

During the life of the trust there’s no Inheritance Tax to pay as long as the asset stays in the trust and remains the ‘interest’ of the beneficiary.

Between 22 March 2006 and 5 October 2008:

• beneficiaries of an interest in possession trust could pass on their interest in possession to other beneficiaries, like their children
• this was called making a ‘transitional serial interest’
• there’s no Inheritance Tax to pay in this situation

From 5 October 2008:

• beneficiaries of an interest in possession trust can’t pass their interest on as a transitional serial interest
• if an interest is transferred after this date there may be a charge of 20% and a 10-yearly Inheritance Tax charge will be payable unless it’s a disabled trust

If you inherit an interest in possession trust from someone who has died, there's no Inheritance Tax at the 10-year anniversary. Instead, 40% tax will be due when you die.

If the trust is set up by a will

Someone might ask that some or all of their assets are put into a trust. This is called a ‘will trust’.

The personal representative of the deceased person has to make sure that the trust is properly set up with all taxes paid, and the trustees make sure that Inheritance Tax is paid on any future charges.

If the deceased transferred assets into a trust before they died

If you’re valuing the estate of someone who has died, you’ll need to find out whether they made any transfers in the 7 years before they died. If they did, and they paid 20% Inheritance Tax, you’ll need to pay an extra 20% from the estate.

Even if no Inheritance Tax was due on the transfer, you still have to add its value to the person's estate when you're valuing it for Inheritance Tax purposes.

Trusts for bereaved minors

A bereaved minor is a person under 18 who has lost at least 1 parent or step-parent. Where a trust is set up for a bereaved minor, there are no Inheritance Tax charges if:

• the assets in the trust are set aside just for bereaved minor
• they become fully entitled to the assets by the age of 18

A trust for a bereaved young person can also be set up as an 18 to 25 trust - the 10-yearly charges don’t apply. However, the main differences are:

• the beneficiary must become fully entitled to the assets in the trust by the age of 25
• when the beneficiary is aged between 18 and 25, Inheritance Tax exit charges may apply

Trusts for disabled beneficiaries

There’s no 10-yearly charge or exit charge on this type of trust as long as the asset stays in the trust and remains the ‘interest’ of the beneficiary.

You also don’t have to pay Inheritance Tax on the transfer of assets into a trust for a disabled person as long as the person making the transfer survives for 7 years after making the transfer.

Paying Inheritance Tax

You pay Inheritance Tax using form IHT100. You can get the form and instructions to complete it on the HMRC website.

If you're valuing the estate of someone who's died, you may have to value other assets apart from trusts to see if Inheritance Tax is due.

More help and information

HMRC has produced detailed guidance on trusts and Inheritance Tax if you need more information - or you can contact the HMRC helpline.

Probate and Inheritance Tax Helpline
Telephone: 0300 123 1072
Find out about call charges

If you’re a trust beneficiary there are different rules depending on the type of trust. You might have to pay tax via Self Assessment, or you might be entitled to a tax refund.

Read the information on the different types of trust to understand the main differences between them. If you’re not sure what type of trust you have, ask the trustees.

Bare trusts

If you’re the beneficiary of a bare trust you are responsible for declaring and paying tax on its income. You do this on your Self Assessment tax return.

Interest in possession trusts

If you’re the beneficiary of this type of trust, you’re entitled to its income (after expenses) as it arises. The trustees pay tax on the income before they pass it to you.

If you ask for a statement, the trustees must tell you:

• the different sources of income
• how much income you have received
• how much tax has been paid on the income

If you’re a basic rate taxpayer you won’t owe any extra tax. You’ll only need to complete a tax return if the income you receive from an interest in possession trust takes your total annual income into the higher rate Income Tax band.

If you’re not a taxpayer, you can reclaim the tax paid using form R40 on the HMRC website.

If you’re a higher rate taxpayer you’ll have to pay extra tax on the difference between what tax the trustees have paid and what you, as a higher rate taxpayer, are liable for. You do this via Self Assessment.

You’ll usually get income sent through the trustees, but they might pass it to you directly without paying tax first. If this happens you need to include it on your Self Assessment tax return.

Accumulation or discretionary trusts

With these trusts all income received by beneficiaries is treated as though it has already been taxed at 45%. If you’re an additional rate taxpayer there will be no more tax to pay.

You may be able to claim tax back on trust income you’ve received if any of the following apply:

• you’re a non-taxpayer
• you pay tax at the basic rate of 20%
• you pay tax at the higher rate of 40%

You can reclaim the tax paid using form R40 on the HMRC website. If you complete a tax return, you can claim via Self Assessment.

Settlor-interested discretionary trusts

If a settlor-interested trust is a discretionary trust, payments made to the settlor’s spouse or civil partner are treated as though they’ve already been taxed at 50%. There’s no more tax to pay. However, unlike payments made from other types of trusts, the tax credit can’t be claimed back.

Non-resident trusts

This is a trust where the trustees aren’t resident in the UK for tax purposes. The tax rules for this type of trust are very complicated - there's detailed guidance on non-resident trusts on the HMRC website.

If you’re a trustee, your responsibilities depend on the type of trust.

In a bare trust you won’t have many duties to perform because the beneficiaries will decide how to use the capital and income and pay the tax.

The person who set up the trust might have given instructions for you in a document called the ‘trust deed’ - you’re legally bound by this.

If there’s more than one trustee

Normally one person will be the ‘principal acting trustee’ - this person deals with HM Revenue and Customs (HMRC).

If you’re the principal acting trustee, your actions are treated as the actions of all the trustees.

All the trustees are jointly liable for tax - so if the principal acting trustee doesn’t pay, HMRC can recover all the tax and any interest from any trustee.

Income Tax and Capital Gains Tax

Trustees are responsible for making sure that any income or gains are declared and tax is paid.

If you’re a trustee and haven’t received a Trust and Estate Tax Return you need to tell HMRC when:

• a new trust that will receive income or make chargeable capital gains has been set up
• a trust that hasn’t been receiving income or making chargeable capital gains starts to do so

Tell HMRC about a new trust using form 41G(Trust).

Download 'Form 41G - trust details' (PDF, 380KB)

Tell HMRC about changes to trusts using the number below:

HMRC Trusts and Deceased Estates Helpline
Telephone: 0300 123 1071
Find out about call charges

The time limit for notification is within 6 months of the end of the tax year.

How to pay

You pay via the Trust and Estate tax return - there’s guidance on the HMRC website.

Inheritance Tax

You need to let HMRC know when:

• there’s a 10-year anniversary
• assets are transferred out

Use form IHT100 on the HMRC website to do this and to pay any Inheritance Tax.

Supplying information to beneficiaries

It’s your responsibility to provide the beneficiaries with a statement when asked, showing how much trust income they received in a tax year and the tax paid on that income.

You can use forms ‘R185 (trust Income)’ or ‘R185 (settlor)’ on the HMRC website to do this.

Download 'Form R185 (trust income)' (PDF, 221KB)

Download 'Form R185 (settlor)' (PDF, 209KB)

Trusts can be complicated, but there are various people who can help.

Tax queries

The HM Revenue and Customs (HMRC) Trusts and Deceased Estates Helpline can help you with Income Tax and Capital Gains Tax queries about trusts.

HMRC Trusts and Deceased Estates Helpline
Telephone: 0300 123 1071

If you have a query about Inheritance Tax and trusts, contact HMRC’s Probate and Inheritance Tax Helpline.

Probate and Inheritance Tax Helpline
Telephone: 0300 123 1072

Find out about call charges.

If you need more help

A solicitor or tax advisor will be able to help you. They can also talk to HM Revenue and Customs (HMRC) on your behalf if you give them permission.

You can find a solicitor online using the:

• Law Society of England and Wales
• Law Society of Scotland

You can also get help from the Society of Trust and Estate Practitioners.