As with individual taxpayers, trusts can be subject to inheritance tax, capital gains tax and income tax.
How income tax is charged will be dependent on the type of trust that has been created and generally, the trustees are liable for any taxable income that the trust produces.
This article will broadly cover the circumstances in which income tax is charged to a trust and explain how different rates of income tax can apply to each type of trust.
For specific cases, it is always best to seek guidance for more detailed advice.
When is Income Tax Charged?
A trust will be subject to income tax on income which is generated from the assets held within that trust. This can include income which arises from interest on savings, dividends from shares and rent from a property.
The rate of income tax payable depends on whether a beneficiary has a right to the income or not.
There may also be circumstances where the income the trust produces is treated as the income of the settlor (the person/people who created the trust).
What are the Income Tax Rates for Trusts?
The rate of income tax charged to a trust varies with the type of trust, as each trust is taxed individually.
It will also depend on whether the beneficiaries or the settlor receives the income from the trust.
The table below sets out the income tax rates for the main types of trusts:
Type of Trust | Rate of Tax: Dividend | Rate of Tax: All other income |
| Accumulation/Discretionary | First £1,000: 7.5% Over £1,000: 38.1% | First £1,000: 20% Over £1,000: 45% |
| Interest in possession | 7.5% | 20% |
How Does Dividend Income Affect Income Tax?
rate of income tax for dividends in an interest in possession trust
Where the trust is an interest in possession trust (i.e. the beneficiary has an immediate right to the income of the trust), the rate of income tax for dividends is currently 7.5%.
rate of income tax for dividends in an accumulation or discretionary trust
Where the trust is an accumulation or discretionary trust, the rate of tax is split. For the first £1,000 of dividend income, the rate of income tax which is applied is 7.5%.
Dividend income over £1,000 attracts a tax rate of 38.1% for trusts above the starting rate on/after 6 April 2016.
Trustees and the dividend allowance
Unlike individuals, trustees do not benefit from a dividend allowance, meaning the trust will be taxed at the appropriate rate on all dividend income and the trustees will be responsible for paying this liability.
Who pays the Income Tax?
The trustees of the trust will be responsible for paying the income tax on the income arising.
If income is then paid to a beneficiary who pays a lower rate of income tax (i.e. at less than the additional rate of 45%), the beneficiary may be able to claim back the extra tax paid on the trust income.
Will the Settlor of the Trust have to pay Income Tax?
There will be certain circumstances where other parties may need to pay income tax.
Where the person who set up the trust, known as the settlor, and/or his family have an interest in that trust, he/she may also have to pay income tax but may be able to seek reimbursement from the trustees for the tax paid.
Who Pays the Income Tax in a Bare Trust?
In respect of a bare trust, the beneficiary pays the income tax due, and this is paid through a Self-Assessment tax return.
If the beneficiary doesn’t ordinarily file Self-Assessment returns, they will need to register with HMRC by the 5th October following the year the income arose.
How Can NSS Legal Help?
For more information on this, please contact our team at NSS Legal, who will be able to provide further information on the duties and responsibilities of taxation on trustees and beneficiaries.
NSS Legal act as trusted advisors to families, trustees and beneficiaries over a range of legal matters. If you are currently considering creating a trust through your Will, our team of specialist trust solicitors in London can assist you through this process.
For more information on the general process and administration of a deceased person’s estate, take a look at our article on Things a Representative Should Be Aware Of.