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Beneficiaries: paying and reclaiming tax on trusts

As a trust beneficiary you must declare any trust income you receive or are entitled to on your personal tax return. If you don't normally complete a return you may need to tell your Tax Office. Depending on your overall income, you may have tax to pay or be able to claim tax back.

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Check the type of trust

As a beneficiary it's important to understand the type of trust, as the tax rules vary according to the trust type.

HM Revenue & Customs (HMRC) can give general guidance, but they can't tell you the type of trust. If you're a beneficiary and you're not sure about the type of trust, you can ask the trustees to tell you.

Below is a breakdown of the main types of trust and the different tax rules for beneficiaries.

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Bare trusts

Income and capital in a bare trust are treated as belonging to the beneficiaries rather than the trustees. The beneficiaries are solely responsible for declaring and paying tax on them.

If you're the beneficiary of a bare trust you may need to tell HMRC about any income or capital gains. You can do this on a Self Assessment tax return using form SA100 not the SA107 (Trusts etc) supplementary pages.

Find out more about bare trusts

Find the form SA100 and guidance notes

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Interest in possession trusts

If you're the income beneficiary of an interest in possession trust you're entitled to the trust income after expenses. However the trustees usually pay tax on any income before they pass the income on to you.

The trustees should be able to show you what income the trust has received on your behalf. One way they can do this is by giving you a completed form R185 (Trust Income) which:

  • lists the different sources of income
  • shows how much income has been received
  • shows how much tax has been paid on the income

Use the figures from this form to fill in the SA107 (Trusts etc) supplementary pages, which you submit with the main SA100 Self Assessment Tax Return. If the trustee hasn't given you a completed form R185 (Trust Income) you can ask them for one.

Income from an interest in possession trust will already have been taxed, so 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 tax band.

If you're a non-taxpayer you can claim tax back using the R40 Tax Repayment Form.

If you're a higher rate taxpayer you'll have to pay 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 by completing form SA107 (Trusts etc) supplementary pages.

Trustees of interest in possession trusts can 'mandate' income to you. This means that the income (for example dividends from shares or interest from a bank account) goes directly to you, not through the trustees. Mandated income should be entered on your own tax return. Trustees should not enter it on the Trust and Estate Tax Return.

Read more about interest in possession trusts

Find the form SA107 Trusts etc and guidance notes

Find the R40 Tax Repayment Form and guidance notes

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Accumulation or discretionary trusts

With these trusts, trustees can either accumulate income (that is add it to the trust capital) rather than pay it out, and/or pay income at discretion by deciding which beneficiary to pay it to, and how much.

All income that the trustees pass on to beneficiaries at their discretion carries a 'tax credit'. The tax credit is 45 per cent for the 2013-14 tax year (50 per cent for 2012-13). This means it is treated as if it has already been taxed at 45 per cent.

If you're an income beneficiary, the trustees should be able to show you what income the trust has paid you by giving you a completed form R185 (Trust Income).

Use the figures from this form to fill in the supplementary pages for trusts - form SA107 (Trusts etc) - on your tax return.
If your trustee hasn't given you a completed form R185 (Trust Income), you can ask them for one.

If you're an additional rate taxpayer there will be no more tax to pay. This is because all income you receive from an accumulation/discretionary trust will carry a tax credit at 45 per cent.

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 per cent
  • you pay tax at the higher rate of 40 per cent

This is because it will have been treated as if it's already been taxed at the 'trust rate' of 45 per cent. You can do this using the R40 Tax Repayment Form. If you're a basic rate taxpayer under Self Assessment, you can use form SA107 (Trusts etc) supplementary pages to declare your trust income and claim tax back. Repayment is made after taking into account all sources of income, not just the trust income.

Read more about discretionary trusts

Find the form SA107 Trusts etc and guidance notes

Find the R40 Tax Repayment Form and guidance notes

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Settlor-interested trusts

Different tax rules apply where the person who set up the trust - the settlor - retains an interest in the trust. You can read more about settlor-interested trusts in the guide below.

If the settlor-interested trust is a discretionary trust - payments made to non-settlor beneficiaries are treated as having been taxed at 45 per cent (2013-14 tax year). This means that there will be no further tax to pay on this income. However, unlike payments made from other types of trusts, the tax credit cannot be repaid to you. Although the non-settlor beneficiary's other income is not pushed into a higher tax rate band, income from a settlor-interested trust may affect tax reliefs and benefits, which are means tested.

Find out more about settlor-interested trusts

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Capital Gains Tax and trusts

Trustees usually have to pay Capital Gains Tax when an asset held within the trust is sold or passed on to a beneficiary.

The two main exceptions to this are:

  • bare trusts, where the beneficiary pays Capital Gains Tax
  • when the trustees apply for 'Hold-over Relief' to defer payment of Capital Gains Tax to the person who receives the asset

You can read more about Hold-over Relief in the guide below.

Calculating Capital Gains Tax for trusts: the basics

Find out more about bare trusts

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More useful links

How to pay Self Assessment

Check current Income Tax rates and allowances

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