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What 'settlor' means

A settlor is someone who 'makes a settlement'. They do this by placing assets such as money, land or buildings in a trust. This is known as 'settling property'. Settlors can do this directly or indirectly, by giving the funds to someone else to set up a trust. They normally place assets in a trust when the trust is created, but can also do so later on.

How settlor-interested trusts work

If the settlor or their spouse or civil partner may benefit from income or gains from assets held in a trust, it's regarded as a settlor-interested trust.

There are other rules for trusts that aren't settlor-interested but where a relevant child of the settlor may benefit. Find out more by reading the guide about parental trusts for children by following the link below.

Settlor-interested trusts aren't a type of trust in their own right - they will be one of the following types of trust:

• interest in possession trusts - where the settlor, the settlor's spouse or civil partner may be entitled to all the income
• accumulation trusts - where trustees can retain and add income to capital on behalf of the settlor, the settlor's spouse or civil partner
• discretionary trusts - where trustees can make payments to the settlor, their spouse or civil partner
  

Example of a settlor-interested discretionary trust

Dave Green has an illness and can no longer work. He decides to set up the Dave Green Discretionary Trust to ensure he has money in the future. He places some of his money in the trust. This makes him the settlor, but he may also benefit from the trust, so he 'retains an interest'. This is because the trustees can make payments to him. As a result, Dave can be taxed on income received by the trustees - more on this below.

If instead Dave's parents provide the money for the trust, they are the settlors. Dave is not a settlor and the trust is not regarded as settlor-interested.

• Parental trusts for children

Settlor-interested trusts and Income Tax

With settlor-interested trusts, the settlor is responsible for all Income Tax due on income received by the trustees, even income that isn't paid out to the settlor. However, the trustees are required to pay tax, as they receive the income.

The Income Tax rate that the trustees pay depends on how the trust has been set up. If it's an accumulation or discretionary trust, the rates for that type of trust apply. If it's an interest in possession trust, the rates for that type of trust apply.

Partly settlor-interested trusts

Trusts can also be partly settlor-interested. Trustees can hold distinct funds within the trust, some of which the settlor (and spouse or civil partner) are excluded from. With partly settlor-interested trusts, the settlor pays tax only on the income produced by that part of the trust fund from which they, their spouse or civil partner may benefit.
Find out more about Income Tax rates for these types of trust by following the links below.

How the settlor reports and pays Income Tax

The trustees must complete a Trust and Estate Tax Return and pay tax on all of the income they receive.

For each year the settlor has additional tax to pay, the settlor must complete form SA107 Trusts etc - the trusts supplementary pages of the main SA100 Tax Return. This form tells HMRC about the Income Tax the Trustees have paid on the settlor’s behalf. If the settlor is sent a tax return they must fill it in and send it back even if there is no more tax due.

The settlor may qualify for a tax refund (or have more tax to pay) depending on their overall level of taxable income.

• Discretionary or accumulation trusts

• Interest in possession trusts

• Get advice about completing a personal tax return

• Form SA107 Trusts etc and guidance notes Opens new window

Settlor-interested 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'.

For the tax year 2007-08 and earlier, settlors pay any Capital Gains Tax due on the gains made by the trust. These gains are added to any other gains that the settlor may have for Capital Gains Tax.

For the tax year 2008-09 onwards, the trustees pay any Capital Gains Tax due on gains they make above the trustees' annual exempt amount.

• Trusts and Capital Gains Tax

Settlor-interested trusts and Inheritance Tax

There may be Inheritance Tax to pay when:

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

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

• Trusts and Inheritance Tax

More useful links

• Help Sheet 270 Trust and settlements - income treated as the settlor's Opens new window

Useful contacts

• Contact HMRC Trusts & Estates