How are Trusts Taxed in the UK?
Trusts in the UK are subject to various taxes, and the specific rules depend on the type of trust and the income or gains involved. In this article, we outline the main taxes impacting trusts in the UK.
1. Income Tax
The trustees of a trust are typically responsible for paying Income Tax on the trust’s income.
Tax Rates:
The tax on Dividend Income is rated at 39.35%. The tax on all other income (Non-dividend) is rated at 45%.
The rate of tax for income used to pay qualifying trust management is 8.75% for dividend income and 20% for other income.
Allowances:
Most trusts benefit from a £500 tax-free income allowance. However, if the trust’s total income is £500 or more, the entire income is taxed, not just the amount exceeding the allowance.
For accumulation or discretionary trusts, if the settlor has multiple trusts, the £500 allowance is split among them, with a minimum of £100 per trust.
Beneficiaries and Tax Credits:
When income is distributed to beneficiaries, it is considered to have had tax deducted at the source (at the 45% rate, and 39.35% for dividends).
Beneficiaries can reclaim the tax paid by the trustees to the extent that the tax deducted (or credited) exceeds their own marginal tax rate.
Trustees issue a form R185 (trust income) to beneficiaries, detailing the net distribution and the 45% tax credit.
2. Capital Gains Tax (CGT)
Trustees are generally responsible for paying CGT when trust assets are sold or transferred.
Tax Rates:
The tax rate on Residential Property Gains is 24%. The tax rate on all other gains is 20%.
Annual Exempt Amount (AEA):
Trusts have a CGT allowance, which is typically half an individual’s AEA (£1,500 for the 2024/25 tax year, or £3,000 if a vulnerable beneficiary).
Reliefs and Exemptions:
- Holdover Relief: Trustees may not pay CGT when transferring assets to beneficiaries; the recipient may pay tax later.
- Main Residence Exemption: No CGT is paid when selling a property that is the main residence for someone the trust permits to live there.
- Business Asset Disposal Relief: Trustees may pay CGT at a lower rate (14% or 10% depending on the date of disposal) on qualifying profits from selling assets used in a beneficiary’s business.
3. Inheritance Tax (IHT)
A 20% IHT charge may apply when assets exceeding the IHT nil-rate band (£325,000) are transferred into a trust during the settlor’s lifetime.
Periodic Charges:
Many trusts (especially discretionary trusts) are subject to IHT charges every 10 years, up to 6% of the trust’s value exceeding the nil-rate band.
Exit Charges:
IHT can be levied when assets are removed from the trust, or when the trust closes.
4. Stamp Duty Land Tax (SDLT)
SDLT is generally not charged on gifts or transfers to a trust, unless the recipient assumes an outstanding mortgage, in which case the SDLT is charged on the mortgage value.
Purchasing Property:
When trustees purchase property, SDLT applies as usual. The 3% surcharge for additional residential properties may apply, depending on the type of trust and the beneficiary’s circumstances.
Important considerations:
- Trustee Responsibilities: Trustees have a legal obligation to comply with HMRC’s tax rules, including registering the trust and filing tax returns.
- Trust Registration Service (TRS): Most trusts must register with HMRC’s TRS, even if they don’t pay tax.
- Vulnerable Beneficiaries: Trusts for vulnerable beneficiaries may be subject to different tax rules and exemptions.
The taxation of trusts can be complex, and it is advisable to seek professional advice to ensure compliance and optimise tax planning.