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What is a mixed trust?

A mixed trust is one where the income is taxable on more than one basis. This may be because there are distinct different parts to the trust fund from the start so that the income is always held in different trusts. However they may also be the result of changes in the beneficiaries’ circumstances as in the following example.

Example

Two children benefit from an accumulation trust. According to the terms of the trust deed, the beneficiaries are entitled to income received by the trust when they reach 18. Zoe reaches 18 while Sarah is still 14. The part of the trust benefiting Zoe becomes an interest in possession trust, while the part that benefits Sarah remains an accumulation trust until she reaches 18. In other words, when Zoe reaches 18 the trust becomes a mixed trust.

Mixed trusts and Income Tax

In mixed trusts, the income for each part of the trust will be taxed under the rules that apply to that type of trust. For example, the part of the trust in which there is an interest in possession will be taxed as such, while the discretionary part will be taxed as a discretionary trust. This applies to the tax responsibilities of both the trustees and the beneficiaries.

• Types of trust and tax implications

Mixed trusts and Capital Gains Tax

Capital Gains Tax is a tax on the gain in the value of assets such as shares, land or buildings. A trust may have to pay Capital Gains Tax if assets are sold, given away or exchanged (disposed of) and they’ve gone up in value since being put into trust.

The trust will only have to pay the tax if the assets have increased in value above a certain allowance known as the 'annual exempt amount'. Trustees are responsible for any Capital Gains Tax due on gains.

Beneficiaries aren't taxed on trust gains and don't get a credit for any tax paid by the trustees.

• Trusts and Capital Gains Tax

Mixed trusts and Inheritance Tax

The different parts of a trust within a mixed trust aren't treated separately for Inheritance Tax. As with discretionary, interest in possession and accumulation trusts, there may be Inheritance Tax to pay if:

• assets are put into a mixed trust
• a mixed trust reaches a ten-year anniversary
• assets are taken out of a mixed trust or the trust ceases

Sometimes Inheritance Tax uses different terminology for trusts. Mixed trusts may fall within what are known as ‘relevant property’ trusts.

• Trusts and Inheritance Tax

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• HMRC Trusts & Estates