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Tax on income received by accumulation/discretionary trusts

Trusts where the trustees can accumulate income and/or pay it at discretion are taxed in a certain way.

The rate of Income Tax payable depends on the type of income and whether or not the income falls within the ‘standard rate band’. This applies to the first £1,000 of income or 'deemed income'. Find out more about deemed income in the section 'Items that are taxed as income on trusts - deemed income' - below.

Tax rates on the first £1,000 of accumulation/discretionary trust income

Tax rates on accumulation/discretionary trust income (over £1,000)

How the standard rate band works

The standard rate band is applied in the following sequence to the different types of income:

• first to non-dividend-type income (rent, business income, savings)
• then to dividend-type income - such as income from stocks and shares
  

If the person who set up the trust - the settlor - has set up more than one trust, the £1,000 standard rate band is divided equally amongst the trusts. However, if the settlor has set up more than five trusts, the standard rate band for each trust stays at £200.

• Tax on savings income from bank and building society accounts

• Tax on UK dividend income

Dividend income - effect of the standard rate band

Dividends from UK companies and some non UK companies carry a 10 per cent tax credit that can be offset against the taxpayer's tax liability. This credit is not repayable.

Once the 10 per cent tax credit is taken into account, any dividend income that falls within the standard rate band won't be liable for any further tax. However the trustee will owe 32.5 per cent Income Tax on dividend income which falls above the standard rate band.

You can find out more about non UK company dividends that carry a UK tax credit on the SA106 Foreign notes pages on the HM Revenue & Customs website.

• SA106 Foreign notes Opens new window

Tax on income paid to beneficiaries from accumulation/discretionary trusts

Where trust income is paid out to a beneficiary at the trustee's discretion it's treated as having already been taxed at the trust rate. This is currently 50 per cent.

Where the trustees haven't paid sufficient tax on the income they may have to pay more tax to cover the beneficiary’s tax credit.

If the beneficiary is a non-taxpayer, or they pay tax at the 20 or 40 per cent rate, they may be able to claim some or all of the tax back. If they pay tax at the 50 per cent rate they will have no more tax to pay on the trust income.

Tax pools help trustees of discretionary trusts keep track of the amount of trust Income Tax paid.

• Beneficiaries: paying and reclaiming tax on trusts

• Tax pool and help with tax pool calculations

Tax on income received by interest in possession trusts

An interest in possession trust is one where the beneficiaries have a right to the income from the trust - after expenses - as it's produced. It has distinct tax rules and - for Income Tax purposes - is sometimes known as a 'non-discretionary trust'. There is usually no 'standard rate band' for this type of trust.

When an interest in possession trust receives income, the trustees must pay tax at the following rates.

Tax rates on an interest in possession (non-discretionary) trust

Interest in possession trusts aren't normally taxed at the special trust rates of tax that apply to non-interest in possession trusts. These rates are 42.5 per cent for dividends and 50 per cent for all other income. However some items that are capital in trust law are treated as income for tax purposes when received by trusts. Depending on the type of item they are either taxed at the trust rate of 50 per cent or the dividend trust rate of 42.5 per cent.

You can find more information about this in the section 'Items that are taxed as income on trusts - deemed income' - below.

• Tax on savings income from bank and building society accounts

• Tax on UK dividend income

Tax on income belonging to beneficiaries from interest in possession trusts

Trustees of interest in possession trusts can ‘mandate’ income to a beneficiary. This means that the income (for example dividends from shares or interest from a bank account) goes directly to them, not through the trustees. Mandated income should be entered on the beneficiary’s own Self Assessment return. Trustees don't enter this income on the Trust and Estate Tax Return.

Where the income is not mandated and trustees have included the income on the trust return and paid tax at the rates shown in the section above, they then pass income after expenses onto the beneficiaries.

If the beneficiary is a non-taxpayer they may be able to claim some or all of the tax back - but not the 10 per cent non-refundable tax credit on dividends.

If the beneficiary pays tax at the 40 or 50 per cent rate, they will have to pay extra tax on the difference between what tax the trustees have paid and what they're liable for as taxpayers.

• Beneficiaries: paying and reclaiming tax on trusts

Items that are taxed as income on trusts - deemed income

Some items that may not appear to be income in the hands of the trustees are taxed as income at the trust rates in accumulation, discretionary or interest in possession trusts. The items are known as deemed income. They include:

• gains on life insurance policies
• accrued income scheme profits
• lease premiums (lump sum payments received instead of rent)
  

Form SA950 'Trust and Estate Tax Return Guide', page 16 onwards gives more details.

This is a complicated area of trust taxation. You can find out more in HM Revenue & Customs’ technical guidance - the Trusts, Settlements and Estates Manual - see the link below.

• Capital items that are income for tax purposes - detailed guidance Opens new window

• SA950 Trust and Estate Tax Return Guide Opens new window

Income Tax rules for other types of trust

Other types of trust have different rules for tax on income they receive. Follow the links below to find out more about each one.

• Bare trusts

• Settlor-interested trusts

• Trusts for vulnerable people

• Non-resident trusts

More useful links

• Types of trust and tax implications

• Completing the Trust and Estate Tax Return

• How to pay Self Assessment Opens new window

Useful contacts

• Contact HMRC Trusts & Estates