Trusts FAQs

Bare Trusts – Income is treated as belonging directly to the beneficiary, who pays any tax due.

Interest in Possession Trusts – Trustees pay tax at the basic rate and pass the income to the beneficiary, who may need to declare it and either pay more or reclaim tax.

Discretionary Trusts – Trustees pay income tax at the higher trust rates (additional rate of tax). When income is distributed, it carries tax credit. Beneficiaries can reclaim tax if their personal rate is lower.

Most trusts don’t pay Income Tax on income up to £500. But if income exceeds £500, tax is charged on the full amount.

If a settlor has created multiple trusts, the £500 is split between them — with a minimum of £100 per trust where there are five or more.

Trust Management Expenses (TMEs) are the costs trustees incur in running the trust.

Discretionary trusts – TMEs reduce the amount of income taxed at the trust tax rates.
Interest in Possession trusts – TMEs reduce the net income available to beneficiaries

• Trustees are generally liable for CGT on gains made by the trust, except for bare trusts, where the beneficiary is liable.
• Rates: For 2025/26, trustees pay 24% on disposals
• Annual Exempt Amount (AEA): Most trustees get half the individual AEA
• Deemed Disposal: When a beneficiary becomes absolutely entitled to trust property, there is a deemed disposal at market value for CGT purposes

Bare trusts: Beneficiaries are taxed directly on income and gains.
Interest in possession trusts: Beneficiaries may need to declare income received and claim a tax credit.
Discretionary trusts: Beneficiaries may reclaim some of the tax credit if their personal tax rate is lower.

Yes. Trusts for vulnerable beneficiaries (disabled persons or bereaved minors) may qualify for special tax treatment, allowing income and gains to be taxed as if they arose directly to the beneficiary, often resulting in a lower tax liability.

• Income Tax Paid: When trustees pay income tax at the trust rate, this tax enters the tax pool.
•  Payments to Beneficiaries: When a discretionary payment is made, it is treated as a net payment from which tax at the trust rate has been deducted. The grossed-up amount and the tax credit (at the trust rate) are calculated.
• Reduction of Tax Pool: The tax pool is reduced by the value of the tax credit attached to each payment to a beneficiary.
• Shortfall: If the tax pool is insufficient to cover the tax credits on payments, trustees must pay the shortfall to HMRC

Bare Trusts:

• The beneficiary is absolutely entitled to the trust assets and income.
• IHT is only relevant if the settlor dies within 7 years of making the transfer.
• No 10-year or exit charges apply

Interest in Possession Trusts:

• If the trust was set up before 22 March 2006, or is an immediate post-death interest, a disabled person’s interest, or a transitional serial interest, the trust is outside the IHT regime for trusts. In these cases, on the death of the life tenant, the value of the trust assets is included in their estate for IHT
• If the trust does not fall within the above category, then IHT regime for trusts apply in the same way as discretionary trusts (10-year charges and exit charges may apply)

Discretionary Trusts:

• Subject to the relevant property regime: 10-year charges and exit charges may apply.
• On the death of a beneficiary, the trust assets are not included in their estate for IHT

Trusts for Vulnerable Beneficiaries (Disabled Persons and Bereaved Minors):

• No 10-year or exit charges apply if the trust continues to meet the qualifying conditions.
• For disabled trusts, the trust must secure that at least half of the property applied during the beneficiary’s life is for their benefit
• For bereaved minors, the trust must provide that the beneficiary becomes absolutely entitled by age 18; for 18-25 trusts, exit charges may apply between ages 18 and 25

• Trustees must report the event and pay any IHT due by the end of the sixth month after the event occurred
• Late filing and payment: Late filing penalties may be issued. Interest is charged on late payments of IHT.
• Some trusts do not need to submit an IHT100 if they meet the rules for excepted transfers and settlements, usually where the trust value is low or the event is not chargeable

• Excluded property (such as certain foreign assets) is not subject to IHT, but may be included in rate calculations for exit and 10-year charges.
• The rules for excluded property changed from 6 April 2025, focusing on the settlor’s long-term UK residence status at the time of the chargeable event or their death

An offshore or non-resident trust is generally a trust where none of the trustees are UK resident for tax purposes, or only some are UK resident and the settlor was not UK resident (or, for trusts created before 6 April 2025, not UK domiciled or deemed domiciled) when the trust was set up or when funds were added.

• All UK express trusts, unless specifically excluded (e.g., Schedule 3A/excluded express trusts), must register, whether or not they have a tax liability.
• Non-UK express trusts must register if they:
  • Acquire land or property in the UK, or
  • Have at least one UK-resident trustee and enter into a business relationship in the UK.
• Any trust (UK or non-UK) that becomes liable for UK taxes such as Income Tax, Capital Gains Tax, Inheritance Tax, Stamp Duty Land Tax, Stamp Duty Reserve Tax, Land and Buildings Transaction Tax (Scotland), or Land Transaction Tax (Wales) must register

• Trustees must keep the register up to date, reporting changes to beneficial owners’ details within 90 days.
• For taxable trusts, an annual declaration by 31 January is required to confirm details are up to date.
• If the trust ends, it must be closed on the register using the online service