Taxation of UK trusts

• Most income is taxed at the rate applicable to trusts – additional tax rates
• When income is distributed to beneficiaries, they receive a tax credit and may reclaim excess tax based on their marginal rate
• Trustees ensure distributions are made within the available trust ‘tax pool’ to avoid a further tax charge

• CGT applies to disposals of trust assets or capital appointments
• Gains are taxed at 24% (2025/26 tax rate)
• Trusts benefit from half an individual’s annual CGT exemption

• Subject to the relevant property IHT regime applicable to trusts
• Transfers into trust are chargeable lifetime transfers (CLTs) and may be subject to IHT at 20% above the £325,000 nil rate band, and up to 40% if the settlor does not survive the gift by 7 years
• Periodic charges apply every 10 years (up to 6%), and exit charges may apply when capital leaves the trust
• Business Property Relief (BPR) can offer IHT relief on qualifying assets such as shares in trading companies and Agricultural Property Relief (APR) relevant for Agricultural Property

• Income is taxed at basic tax rates
• Net income is paid to the life tenant, who includes it on their tax return with a credit for tax already paid
• In some cases, the income might be mandated to, and reported directly by, the beneficiary

• Trusts pay CGT on disposals, with half the personal annual exemption
• Gains are taxed at 24% (2025/26 tax rate)

• Different IHT rules apply to qualifying and non-qualifying Interest in Possession (IIP) Trusts

• For qualifying IIPs, trust assets form part of the beneficiary’s estate upon death

• For non-qualifying IIPs, they are subject to the relevant property IHT regime applicable to trusts (similar to discretionary trusts). Periodic and exit charges may apply, but IHT reliefs (eg BPR / APR) may be available
• Creation of a new trust is a CLT (unless created on death) and subject to the same IHT rules as discretionary trusts

• Beneficiaries are taxed directly on income and capital gains
• Anti-avoidance rules apply: if a parent settles funds and income exceeds £100, it may be taxed on the parent

• Creation is a potentially exempt transfer (PET); no IHT if the donor survives seven years
• Assets form part of the beneficiary’s estate upon death

• UK income is taxable; foreign income generally isn’t (for the trust itself)
• Anti-avoidance rules can attribute income or gains to UK-resident settlors or beneficiaries in some circumstances
• Complex rules govern settlor-interested trusts
• From 6 April 2025, UK resident settlors are taxed on all income and gains arising in settlor-interested offshore trusts as they arise, unless they qualify for the new 4-year Foreign Income and Gains (FIG) regime

Old rules to 5 April 2025:

• Offshore trusts created by UK-domiciled individuals are taxed like UK trusts
• Certain Excluded Property Trusts created by non-doms can keep foreign assets outside the UK IHT net
  New rules from 6th April 2025
• From 6 April 2025, worldwide assets of offshore trusts with long-term UK resident settlors fall within the UK IHT net