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Different types of trust income may have different rates of tax. This guide looks at how these rates vary according to the two main types of UK family trust: accumulation/discretionary and interest in possession. There are also links to rules for other types of trust.
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Trusts where the trustees can accumulate income and/or pay it at discretion are taxed in a certain way.
The rate of Income Tax payable depends on the type of income and whether or not the income falls within the ‘standard rate band’, which applies to the first £1,000 of income or 'deemed income'. Find out more about deemed income in the section 'Items that are taxed as income on trusts - deemed income' - see below.
| Type of income | Tax rate - 2011-12 tax year |
|---|---|
| Dividend-type income (such as income from stocks and shares) | 10% (the 'dividend ordinary rate') |
| All other income (rent, business income, savings) | 20% (the 'basic rate') |
| Type of income | Tax rate - 2011-12 tax year |
|---|---|
| Dividend-type income (such as income from stocks and shares) | 42.5% (the 'dividend trust rate') |
| All other income (rent, business income, savings) | 50% (the 'trust rate') |
The standard rate band is applied in the following sequence to the different types of income:
If the person who set up the trust - the settlor - has set up more than one trust, the £1,000 standard rate band is divided equally amongst the trusts. However, if the settlor has set up five or more trusts, the standard rate band for each trust is £200.
Find out more about tax on savings income from bank and building society accounts
Find out more about tax on UK dividend income
Dividends from UK companies and some non UK companies carry a 10 per cent tax credit that can be offset against the taxpayer's tax liability. This credit can't be reclaimed.
This means that once the 10 per cent tax credit is taken into account, any dividend income that falls within the standard rate band won't be liable for any further tax. However the trustee will owe 32.5 per cent Income Tax on dividend income which falls above the standard rate band.
You can find out more about non UK company dividends that carry a UK tax credit on the SA106 Foreign notes pages.
Where trust income is paid out to a beneficiary at the trustee's discretion it is treated as having already been taxed at the trust rate - currently 50 per cent. Where the trustees haven't paid sufficient tax on the income they may have to pay more tax to cover the beneficiary’s tax credit. If the beneficiary's overall level of income means they're a non-taxpayer, or they pay tax at the 20 or 40 per cent rate, they may be able to reclaim some or all of the tax back. If they pay tax at the 50 per cent rate they will have no more tax to pay on the trust income. Tax pools help trustees of discretionary trusts keep track of the amount of trust Income Tax paid. You can find out more by reading the guides below.
How to pay and reclaim tax as a trust beneficiary
Tax pool and help with tax pool calculations
An interest in possession trust is one where the beneficiaries have a current right to all of the income of the trust - after expenses - as it's produced. It has distinct tax rules and - for Income Tax purposes - is sometimes known as a 'non-discretionary trust'. There is usually no 'standard rate band' for this type of trust.
When an interest in possession trust receives income, the trustees must pay tax at the following rates.
| Type of income | Tax rate - 2011-12 tax year |
|---|---|
| Dividend-type income (such as income from stocks and shares) | 10% (the 'dividend ordinary rate') |
| All other income (rent, business income, savings) | 20% (the 'basic rate') |
Interest in possession trusts aren't normally taxed at the special trust rates of tax that apply to non-interest in possession trusts, which are 42.5 per cent for dividends and 50 per cent for all other income. However some items that are capital in trust law are treated as income for tax purposes when received by trusts. Depending on the type of item they are either taxed at the trust rate of 50 per cent or the dividend trust rate of 42.5 per cent.
You can find more information about this in the section 'Items that are taxed as income on trusts - deemed income' - see below.
Find out more about tax on savings income from bank and building society accounts
Find out more about tax on UK dividend income
Trustees of interest in possession trusts can ‘mandate’ income to a beneficiary, which means that the income (for example dividends from shares or interest from a bank account) goes directly to them, not through the trustees. Mandated income should be entered on the beneficiary’s own return or reported to their Tax Office. Trustees don't enter this income on the Trust and Estate Tax Return.
Where the income is not mandated and trustees have included the income on the trust return and paid tax at the rates shown in the section above, the trustees then pass income after expenses onto the beneficiaries.
Having paid tax at the rates shown above, the trustees pass income onto the beneficiaries. If the beneficiary's overall level of income means they're a non-taxpayer they may be able to reclaim some or all of the tax back - but not the 10 per cent non-refundable tax credit on dividends. If the beneficiary pays tax at the 40 or 50 per cent rate, they will have to pay extra tax on the difference between what tax the trustees have paid and what they're liable for as taxpayers.
How to pay and reclaim tax as a trust beneficiary
Some items that may not appear to be income in the hands of the trustees are taxed as income at the trust rates in accumulation, discretionary or interest in possession trusts. The items are known as deemed income. They include:
Please see form SA950 Trust and Estate Tax Return Guide, page 16 onwards. This is a complicated area of trust taxation. You can find out more about capital items that are treated as income in HM Revenue & Customs’ technical guidance - Trusts, Settlements and Estates Manual - see the link below.
Read technical information on capital items that are income for tax purposes
Download SA950 Trust and Estate Tax Return Guide
Other types of trust have different rules for tax on income they receive. Follow the links below to find out more about each one.
Trusts with vulnerable beneficiaries
Find out about tax on different types of trust
