Settlor-interested trusts

A settlor is someone who ‘makes a settlement’ - by placing money or other assets in a trust. Usually this is done for the benefit of someone else, but sometimes the settlor benefits from the trust. When this is the case, the trust becomes a ‘settlor-interested’ trust.

On this page:

What ‘settlor’ means
How settlor-interested trusts work
Settlor-interested trusts and Income Tax
Settlor-interested trusts and Capital Gains Tax
Settlor-interested trusts and Inheritance Tax
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What ‘settlor’ means

A settlor is someone who ‘makes a settlement’. They do this by placing money or other assets in a trust. This is known as ‘settling property’. Settlors can do this directly or indirectly, by giving the funds to someone else to set up a trust. They normally place property in a trust when the trust is created, but can also do so later on.

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How settlor-interested trusts work

If any of the following people benefit from income or gains from a trust, it is regarded as settlor-interested:

the settlor
the settlor’s spouse or civil partner

There are additional rules for trusts that are not settlor-interested but from which a relevant child of the settlor may benefit. Read our related guide below to find out more.

Find out about parental trusts for minors

Settlor-interested trusts aren’t a type of trust in their own right - they will be one of the following types of trust:

interest in possession trusts - where the settlor, the settlor’s spouse or civil partner may be entitled to all the income
accumulation trusts - where trustees can retain and accumulate income on behalf of the settlor, the settlor’s spouse or civil partner
discretionary trusts - where trustees can make payments to the settlor, their spouse or civil partner

Example of a settlor-interested discretionary trust

Dave Green has an illness and can no longer work. He decides to set up the Dave Green Discretionary Trust to ensure he has money in the future. He places some of his money in the trust. This makes him the settlor, but he also benefits from the trust, so he ‘retains an interest’. This is because the trustees can make payments to him. As a result, Dave can be taxed on income received by the trustees - more on this below.

If instead Dave’s parents provide the money for the trust, they are the settlors. Dave is not a settlor, therefore the trust is not regarded as settlor-interested.

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Settlor-interested trusts and Income Tax

With settlor-interested trusts, the settlor is liable for all Income Tax due on income received by the trustees, even income that is not paid out to the settlor. However, the trustees are required to pay the tax, as the recipients of the income.

The Income Tax rate applied depends on how the trust has been set up. If it operates as an accumulation or discretionary trust, the rate for that type of trust applies. If it operates as an interest in possession trust, the rate for that type of trust applies.

Partly settlor-interested trusts

Settlor-interested trusts can also be partly settlor-interested. Trustees can hold distinct funds within the trust, some of which the settlor (and spouse or civil partner) are excluded from. With partly settlor-interested trusts, the settlor pays tax only on the income arising from the part of the trust from which they, their spouse or civil partner may benefit.

Find out more about the Income Tax rates for discretionary or accumulation trusts

Get more information about the Income Tax rates for interest in possession trusts

How the settlor reports and pays Income Tax

Although the settlor is liable for all the tax due on income from a settlor-interested trust (or the settlor-interested element of a partly settlor-interested trust), the trustees must still complete a Trust and Estate Tax Return and pay tax on all of the income they receive from the trust.

Each year, the settlor must then enter on their personal tax return details of the Income Tax the trustees have paid on their behalf. They do this using form SA107 Trusts etc - the trusts supplementary pages of the main SA100 Tax Return form.

The settlor can set the amount paid by the trustee on their behalf against the amount of tax they have to pay and (depending on their overall level of taxable income) may qualify for a refund or have to pay more tax.

Find form SA107 Trusts etc and guidance notes

Get advice about completing a personal tax return

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Settlor-interested trusts and Capital Gains Tax

Capital Gains Tax is a tax payable on ‘gains’ (profits) made from the sale or transfer of assets such as shares, property or possessions.

For the tax year 2007-08 and earlier, settlors pay Capital Gains Tax on any chargeable gains made by the trustees. These gains are added to the settlor’s personal gains.

For the tax year 2008-09 and beyond, the trustees pay Capital Gains Tax on any chargeable gains they make above an amount called the ‘annual exempt amount’.

Get more information on Trusts and Capital Gains Tax

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Settlor-interested trusts and Inheritance Tax

There may be an Inheritance Tax charge when:

assets (money or property) are put into a trust
a trust reaches a ten-year anniversary
assets are distributed from a trust
the settlor dies

The Inheritance Tax regime sometimes uses its own classification for trusts. Settlor-interested trusts may fall within what are known as ‘relevant property’ trusts, which have to pay Inheritance Tax on anything above the Inheritance Tax threshold of £312,000.

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