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 2 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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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.’ This 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' - below.

Tax rates on the first £1,000 of accumulation/discretionary trust income

Type of income Tax rate - 2014 to 2015 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')


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

Type of income Tax rate - 2014 to 2015 tax year
Dividend-type income (such as income from stocks and shares) 37.5% (the 'dividend trust rate')
All other income (rent, business income, savings) 45% (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 - such as income from stocks and shares

If the person who set up the trust - the settlor - has set up more than 1 trust, the £1,000 standard rate band is divided equally amongst the trusts. However, if the settlor has set up more than 5 trusts, the standard rate band for each trust stays at £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 and some non UK companies carry a 10% tax credit that can be offset against the taxpayer's tax liability. This credit is not repayable.

Once the 10% 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 27.5% 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.

Find SA106 Foreign notes

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Tax on income paid to beneficiaries from accumulation/discretionary trusts

Where trust income is paid to a beneficiary at the trustee's discretion it's treated as having already been taxed at the trust rate. This is currently 45%. 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 is a non-taxpayer, or they pay tax at the 20 or 40% rate, they may be able to claim some or all of the tax back. If they pay tax at the 45% 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

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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 right to the income from 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.

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

Type of income Tax rate - 2014 to 2015 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. These rates are 37.5% for dividends and 45% 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 45% or the dividend trust rate of 37.5%.

You can find more information about this in the section 'Items that are taxed as income on trusts - deemed income' - 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

Trustees of interest in possession trusts can ‘mandate’ income to a beneficiary. This 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 Self Assessment tax return. 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, they then pass income after expenses onto the beneficiaries.

If the beneficiary is a non-taxpayer they may be able to claim some or all of the tax back - but not the 10% non-refundable tax credit on dividends. If the beneficiary pays tax at the 40 or 45% 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

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Items that are taxed as income on trusts - deemed income

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:

  • gains on life insurance policies
  • accrued income scheme profits
  • lease premiums (lump sum payments received instead of rent)

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 in HM Revenue & Customs’ technical guidance - the 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

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Income Tax rules for other types of trust

Other types of trust have different rules for tax on income they receive. Follow the links below to find out more about each one.

Bare trusts

Settlor-interested trusts

Trusts for vulnerable people

Non-resident trusts

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More useful links

Find out about tax on different types of trust

Guidance on filling in the Trust and Estate Tax Return

How to pay Self Assessment

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