Tax on different kinds of trust income

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.

On this page:

Tax on income received by accumulation/discretionary trusts
Tax on income paid to beneficiaries from accumulation/discretionary trusts
Tax on income received by interest in possession trusts
Tax on income belonging to beneficiaries from interest in possession trusts
Other items that are taxed on trusts as income
Income Tax rules for other types of trust
More useful links

Tax on income received by accumulation/discretionary trusts

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.

Tax rates on accumulation/discretionary trust income (the first £1,000 or ‘standard rate band’)

Type of income	Tax rate 2008-09
Dividend-type income	10% (the ‘dividend ordinary rate’)
All other income (rent, business income, savings)	20% (the ‘basic rate’)

Tax rates on accumulation/discretionary trust income (over £1,000)

Type of income	Tax rate 2008-09
Dividend-type income	32.5% (the ‘dividend trust rate’)
All other income (rent, business income, savings)	40% (the ‘trust rate’)

How the standard rate band works

The standard rate band is applied in the following sequence to the different types of income:

first to non-dividend-type income (rent, business income, savings)
then to dividend-type income

If the person who set up the trust - the settlor - has more than one trust, the £1,000 standard rate band is divided equally amongst the trusts. However, if the settlor has 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

Dividend income - effect of the standard rate band

Dividends from UK companies carry a 10 per cent tax credit that can be set against the taxpayer’s tax liability. This credit cannot 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 will not be liable for any further tax. However the trustee will owe 22.5 per cent Income Tax on dividend income which falls above the standard rate band.

It is extremely unlikely that a dividend a trust receives does not carry this 10 per cent tax credit.

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Tax on income paid to beneficiaries from accumulation/discretionary trusts

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 40 per cent.

If the beneficiary’s overall level of income means they are a non-taxpayer or basic rate taxpayer, they may be able to reclaim some or all of the tax back. If they are a higher rate taxpayer they will have no more tax to pay on the trust income. You can find out more by reading the related guide below.

How to pay and reclaim tax as a trust beneficiary

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Tax on income received by interest in possession trusts

An interest in possession trust is one where the beneficiaries have a current legal right to all of the income of the trust as it arises. It has distinct tax rules and - for Income Tax purposes - is sometimes referred to as a ‘non-discretionary trust’. There is 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.

Tax rates on an interest in possession (non-discretionary) trust

Type of income	Tax rate 2008-09
Dividend-type income	10% (the ‘dividend ordinary rate’)
All other income (rent, business income, savings)	20% (the ‘basic rate’)

Interest in possession trusts are not normally taxed at the ‘special trust rates’ of tax that apply to discretionary trusts (32.5 per cent for dividends and 40 per cent for all other income). But there are certain capital receipts that are deemed to be income and are taxed at these higher rates.

You can find more information about deemed income in the section ‘Other items that are taxed on trusts as 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

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Tax on income belonging to beneficiaries from interest in possession trusts

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 are 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 is a higher rate taxpayer they will have to pay extra tax on the difference between what tax the trustees have paid and what they, as higher rate taxpayers, are liable for.

How to pay and reclaim tax as a trust beneficiary

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