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Trust Income Tax reliefs and deductions

Trust Income Tax reliefs and deductions

Trustees may be able to reduce the trust's Income Tax in several ways. This guide covers the main tax reliefs and deductions that are available for trust income. It explains how to take these into account when working out the Income Tax due - and where to find out more.

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Trust management expenses
Other deductions you can make from trust income
Trusts with vulnerable beneficiaries
More useful links

Trust management expenses

Trustees may sometimes have to meet expenses when they carry out their duties. They may be able to deduct some of these from the trust's or the beneficiary’s taxable income. These expenses are called 'trust management expenses'.

Which expenses qualify as allowable?

Only trustee expenses that relate directly to trust income qualify as allowable trust management expenses. Some examples of expenses that do qualify include:

the costs of preparing a tax return for income received (this does not cover capital gains pages, which must be excluded from the expenses claimed)
interest on a loan taken out to pay Inheritance Tax
interest on a loan taken out to purchase an income-bearing asset, such as shares

Some examples of expenses that don’t qualify include:

expenses incurred for the benefit of the whole estate, such as legal expenses
the cost of investment advice or of changing trust investments

(Under trust law, the above expenses relate to trust capital not trust income.)

Note also that expenses associated with things like trading or running a business don't count as trust management expenses. A trust's business expenses are deducted from its trading profits, just as they are with any other business - see the section below on other deductions.

An occasional misunderstanding is that trust payments to beneficiaries count as management expenses. This is not the case.

HM Revenue & Customs (HMRC) Help Sheet IR392 Trust Management Expenses explains which expenses do and which expenses don't qualify.

Download Help Sheet IR392 'Trust Management Expenses' (PDF 89K )

Rules for deducting expenses for accumulation or discretionary trusts

With accumulation or discretionary trusts, allowable expenses can only be deducted from the income the trustees receive that is taxable at the ‘special trust rates’ of 32.5 per cent for dividends or 40 per cent for all other income. Expenses can’t be deducted from the income of any part of the trust that is treated differently for tax purposes, for example in a mixed trust where part of the trust is treated as an interest in possession trust.

Also, income that has been applied to pay trust management expenses is not chargeable at the special trust rates. So any income that has been applied in this way is not included in the ‘standard rate band', which is the first £1,000 of income that is taxed at lower rates.

For accumulation or discretionary trusts, expenses are taken into account in the tax year in which they are incurred.

You can find out more about the standard rate band in the guide below.

Tax on different kinds of trust income

Find out more about discretionary trusts or accumulation trusts

Find out more about interest in possession trusts

Deducting expenses for interest in possession trusts

In the case of interest in possession trusts, allowable trust expenses can only be offset against the income received by the beneficiary - they cannot be used to reduce the trustees' taxable income. The trustees would therefore take them into account when arriving at the income due to beneficiaries.

The expenses are taken into account in the tax year in which they are incurred.

Find out more about interest in possession trusts

Sequence for deducting expenses from different types of income

Trust management expenses are deducted from different types of income in strict order, as follows:

first from dividend-type income
then from non-dividend-type income (rent, trade, savings)

Where to find out more

You can find out more about dealing with trust management expenses in the HMRC guide on filling in the Trust and Estate Tax Return. The notes to Question 13 give examples that show how to work out the expenses deduction for the different types of trust.

Download guidance notes on filling in the Trust and Estate Tax Return (PDF 849K)

Download Help Sheet IR392 'Trust Management Expenses' (PDF 89K)

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Other deductions you can make from trust income

Trustees may be able to claim several other reliefs and allowances on a trust's income from:

a trade or partnership carried on by the trustees
UK land and property that the trust holds
foreign assets

You can get more information about these reliefs and allowances in the guidance notes for the relevant supplementary pages of the Trust and Estate Tax Return. These pages are:

Trust and Estate Trade
Trust and Estate Partnership
Trust and Estate UK Property
Trust and Estate Foreign

Download the guidance notes on filling in the Trust and Estate Trade pages (PDF 128K)

Download the guidance notes on filling in the Trust and Estate Partnership Pages (PDF 111K)

Download the guidance notes on filling in the Trust and Estate UK Property Pages (PDF 125K)

Download the guidance notes on filling in the Trust and Estate Foreign Pages (PDF 244K)

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Trusts with vulnerable beneficiaries

Certain trusts set up to help 'vulnerable beneficiaries' may qualify for special tax treatment. In this context, a vulnerable beneficiary is one of the following:

a person with a mental or physical disability
a child below the age of 18 - a 'relevant minor' - whose parent has died

The trustees are able to claim a relief based on the difference between what they would ordinarily have to pay and what the vulnerable beneficiary would have had to pay had the income of the trust arisen directly to them as individuals.

You can find out more about these types of trust and how they are taxed in our guide on trusts with vulnerable beneficiaries.

Find out more about trusts with vulnerable beneficiaries

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