What Is a Trust for Tax Purposes in the UK?

Tax Queen

Tax Expert @ Pie

7 min read

This guide explains what a trust is for UK tax purposes and how HMRC taxes one. It sets out the three roles of settlor, trustee and beneficiary, the main trust types including bare, interest in possession and discretionary trusts, and how each is treated for income tax, capital gains tax and inheritance tax. It covers the 45% trust rate, the £500 de minimis that replaced the old standard rate band, the £1,500 trustee capital gains allowance, the relevant property charges of 20% on entry and up to 6% every 10 years, and the registration and filing duties trustees carry. It also flags the changes arriving in April 2026 and April 2027. It is written for anyone in the UK setting up a trust, acting as a trustee, or receiving money from one.

What a Trust Actually Is

Strip away the legal language and a trust is a simple arrangement. One person gives assets to another person to look after for the benefit of somebody else.

Three roles make it work. The settlor puts the assets in. The trustees legally own and manage them. The beneficiaries are the people who benefit from them.

The point that matters for tax is the split between legal ownership and beneficial ownership. Trustees hold the legal title, but they do not own the assets for their own benefit. That separation is why HMRC treats a trust as a taxable entity in its own right rather than simply looking through to the people involved.

A trust is not a company, it is not a bank account with a fancy name, and setting one up does not make tax disappear. In many cases it makes the tax higher, not lower. What it does is control who gets what, and when.

Settlor and beneficiary signing with an legal aide

The Trust Types That Determine Everything Else

Almost every tax question about trusts is really a question about which type you are dealing with.

Bare trusts

The beneficiary has an absolute right to the assets and income. For tax purposes HMRC largely ignores the trust and taxes the beneficiary directly at their own rates, using their own allowances. Commonly used to hold assets for a child until 18.

Interest in possession trusts

A named beneficiary, often called the life tenant, has the right to income as it arises. Trustees pay basic rate tax and the beneficiary is taxed at their own marginal rate with credit for what the trustees have paid. Typical in wills where a surviving spouse receives income but the capital passes to children.

Discretionary trusts

Trustees decide who receives what and when. No beneficiary has a fixed entitlement, so the trust itself carries the tax at the highest rates. This is the type most people mean when they say trust, and the one HMRC taxes most heavily.

Settlor interested trust

Where the settlor or their spouse can benefit, anti-avoidance rules attribute the income straight back to the settlor. The trust structure gives no income tax advantage at all.

Income Tax Inside a Trust

For discretionary and accumulation trusts, the rates are punishing by design.

The trust rate is 45% on rental income, savings interest and most other income, and 39.35% on dividends. There is no personal allowance and no savings allowance.

The old £1,000 standard rate band was abolished from 6 April 2024 and replaced with a £500 de minimis. This is where trustees get caught, because it is a cliff edge rather than a band. If total trust income is £500 or less, there is no tax and no reporting. If it is £501, the whole amount is taxed at trust rates from the first pound.

The £500 is also divided between all trusts created by the same settlor, subject to a floor of £100 per trust. Someone who set up four trusts does not get £500 each.

Interest in possession and bare trusts work differently, with the income taxed on the beneficiary at their own rates. Where the underlying income is rental profit, the ordinary property rules still apply, so see rental income tax. Where it is dividends, see reporting dividend income on Self Assessment.

What Beneficiaries Actually Receive

When a discretionary trust pays income out, the payment carries a tax credit at 45%, evidenced on form R185.

The beneficiary grosses the payment up, reports it on their own return, and pays their own marginal rate. Where their rate is below 45%, the excess is reclaimable.

That produces some sizable repayments. A basic rate beneficiary receiving £5,500 grosses it up to £10,000, owes £2,000 at 20%, and reclaims £2,500. A non-taxpayer reclaims the lot. Our guides to Self Assessment and claiming a tax refund cover the mechanics from the beneficiary's side.

This is worth knowing because reclaimable trust credits are among the most commonly forgotten refunds in the system. If you receive money from a family trust and do not file a return, there is a reasonable chance HMRC is holding money that belongs to you.

Capital Gains Tax for Trustees

Trustees pay capital gains tax at 24% on all chargeable gains following the change on 30 October 2024, which removed the old split between residential property and other assets for trustees.

The trustee annual exempt amount is £1,500 for 2026/27, half the £3,000 available to individuals. It is shared between trusts created by the same settlor with a floor of £300 each. Trusts for vulnerable beneficiaries can access the full £3,000.

Two practical points. A disposal of UK residential property must be reported and the tax paid within 60 days, separately from the annual return. And putting assets into a trust is itself a disposal at market value, which can crystallise a gain before the trust has any cash to pay it. Hold-over relief may be available on certain transfers. For the underlying concepts, see what is a capital gain and the capital gains allowance.

The Inheritance Tax Layer Most People Miss

Discretionary trusts sit inside what HMRC calls the relevant property regime, and it charges tax at three separate points.

On the way in. A lifetime transfer into the trust above the settlor's available nil rate band of £325,000 attracts an immediate charge of 20%, rising to 40% if the settlor dies within 7 years.

Every ten years. A periodic charge of up to 6% applies to the value above the nil rate band on each 10 year anniversary.

On the way out. An exit charge applies when assets leave the trust, pro-rated by the number of complete quarters since the last 10 year review.

None of this makes trusts pointless for estate planning, but it does mean the phrase avoiding inheritance tax is misleading. A trust changes the shape and timing of the charge rather than removing it. For the general position, see inheritance tax and how much inheritance tax you pay on £1 million.

Trust income checking the 45 per cent trust rate and £500 de minimis

What Trustees Must Actually Do

Registration comes first. Almost all UK express trusts must register with HMRC's Trust Registration Service, generally within 90 days of creation, whether or not there is any tax to pay. Certain bare trusts and a short list of excluded arrangements are outside it. Changes to the details must also be reported within 90 days.

Filing comes second. Where there is taxable income or gains, trustees file form SA900, the Trust and Estate Tax Return, by 31 October for paper or 31 January online following the end of the tax year. Tax is due by 31 January, with payments on account where applicable.

Worth noting for anyone tracking the wider digital changes, trusts submitting an SA900 are outside Making Tax Digital for Income Tax, so the quarterly update regime that now applies to sole traders and landlords does not reach trustees.

What is Changing

Three dates are worth putting in the diary.

From 6 April 2026, Business Property Relief and Agricultural Property Relief are capped, with 100% relief limited to the first £1 million of qualifying property. Trusts holding business or farming assets need reviewing before the caps bite.

Also from 6 April 2026, the dividend ordinary rate used for certain trust expense calculations moves from 8.75% to 10.75%, though the main 39.35% dividend trust rate is unchanged.

From 6 April 2027, unused pension funds and death benefits come inside the inheritance tax net, which changes how trusts and pensions interact in family planning. Our coverage of the end of the pension inheritance tax exemption explains the shift. From the same date, the trust rate applying to savings and property income is set to rise by 2 percentage points to 47%, in line with the wider change to savings and property income taxation.

Calendar and estate planning documents marking a trust ten year inheritance tax anniversary

Where This Leaves You

If you are a settlor, understand that the trust rate is deliberately set at the top so there is no income tax advantage in parking income inside one.

If you are a trustee, register within 90 days, watch the £500 cliff edge, and remember the 10 year anniversary before it arrives rather than afterwards.

And if you are a beneficiary receiving distributions, the 45% credit on your R185 is real money. Pie handles your own Self Assessment side of that, bringing trust income together with your other income so the credit is claimed rather than left with HMRC. See how it works, find out why Pie suits people with income from several sources to check whether a repayment is sitting there.

Trust taxation is one of the areas where professional advice genuinely earns its fee, particularly on setup and on 10 year anniversaries. This guide is the map, not the itinerary.

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What a Trust Actually Is

Strip away the legal language and a trust is a simple arrangement. One person gives assets to another person to look after for the benefit of somebody else.

Three roles make it work. The settlor puts the assets in. The trustees legally own and manage them. The beneficiaries are the people who benefit from them.

What Is a Trust for Tax Purposes in the UK?

What a Trust Actually Is