In this section:

Introduction to trusts
Types of trust and tax implications
Trustee tax obligations
Completing the Trust and Estate Tax Return
Trusts and Income Tax
Trusts and Capital Gains Tax
Trusts and Inheritance Tax
Beneficiaries: paying and reclaiming tax on trusts
Trusts for agents and advisers

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Beneficiaries: paying and reclaiming tax on trusts

Beneficiaries: paying and reclaiming tax on trusts

As a trust beneficiary you must declare any trust income you receive 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 eligible to claim tax back.

On this page:

Check what type of trust you have
Bare trusts
Interest in possession trusts
Accumulation or discretionary trusts
Settlor-interested trusts
Capital Gains Tax
More useful links

Check what type of trust you have

As a beneficiary, it is important to understand what type of trust you have, as the tax rules vary according to the trust type.

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

Below is a breakdown of the main types of trust and the different tax rules, as they impact on 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.

As a beneficiary of a bare trust you need to account for any Income Tax or Capital Gains Tax on your Self Assessment tax return. You do this on the sections of the form SA100 that deal with income, 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

As the beneficiary of an interest in possession trust you are immediately entitled to all income from it. 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

You can use figures from form R185 (Trust Income) to fill in the SA107 Trusts etc supplementary pages, which you submit with the main SA100 Self Assessment tax return.

If your trustee hasn’t given you a completed form R185 (Trust Income), you can ask 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. If you don’t usually complete a tax return, you only need to complete one if the income you receive from an interest in possession trust takes your total annual income into the higher rate tax band.

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

If you are a higher rate taxpayer you’ll have to pay extra 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.

Trustees of interest in possession trusts can ‘mandate’ income to you, which 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 return or reported to your Tax Office. (Trustees should not enter it on the Trust and Estate Tax Return.)

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

In these trusts, trustees can either accumulate income 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 onto beneficiaries at their discretion carries a ‘tax credit’ of 40 per cent. This means it is treated as if it has already been taxed at 40 per cent.

If you are a beneficiary, the trustees should be able to show you what income the trust has paid to you and may do so by giving you a completed form R185(Trust Income).

You can use figures from form R185 (Trust Income) to fill in the supplementary pages for trusts - form SA107 Trusts etc - on your Self Assessment tax return.

If your trustee hasn’t given you a completed form R185(Trust Income), you can ask for one.

If you are a higher rate taxpayer there will be no more tax to pay, as all income you receive from an accumulation/discretionary trust will carry a tax credit at 40 per cent.

If you are a non-taxpayer or basic rate taxpayer, you may be able to claim tax back on trust income you have received, because it will have been treated as if it’s already been taxed at 40 per cent. You can do this using the R40 claim form. If you’re a basic rate taxpayer under Self Assessment, you can use form SA107 Trust etc to declare your trust income and claim tax back. Repayment is made after taking into account all sources of income, not only the trust income.

Settlor-interested trusts

Different tax rules apply where the person who set up the trust - the settlor - is also a beneficiary. You can read more about settlor-interested trusts in the guide below.

If the settlor-interested trust is a discretionary trust - that is the trustees retain discretion over how to make payments - payments made to non-settlor beneficiaries are treated as having been taxed at 40 per cent. This means that there will be no further tax to pay on this income. 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

In general, the trustees have to pay Capital Gains Tax when an asset held within the trust is sold, or passed on to a beneficiary of the trust.

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