Accumulation and Discretionary Trust Taxes
HMRC treats the income received by beneficiaries as already being taxed at 45% (including for additional rate taxpayers).
In some cases, you can claim tax back on the trust income that you have received as a non-taxpayer, or even if you (either):
- Pay tax at the basic rate (e.g. 20%)
- Pay tax at the higher rate (e.g. 40%)
Note: You can read detailed guidance about how to apply for a repayment of tax on savings interest (using form R40) if you do not usually complete a Self Assessment tax return.
Beneficiaries of Bare Trusts
Under the rules of trusts and taxation, the beneficiary of a bare trust is responsible for declaring the income and then paying tax on it (e.g. using a Self Assessment tax return).
What if you do not usually send a tax return to HMRC? If not, you would need to register for Self Assessment (no later than the 5th of October following the tax year that you received the income).
‘Interest in Possession’ Trust Tax
Beneficiaries of these trust types have entitlement to the income as it arises (after any relevant expenses). As a result, the trustee(s) must provide you with a statement that contains information about the:
- Amount of income you received (and sources).
- How much taxation has already been paid on the income created from the trust (e.g. to HM Revenue and Customs).
Important: The trustees may send the income ‘directly’ to you (e.g. without paying the tax beforehand). In this case, you would need to include it on your Self Assessment tax return.
Basic Rate Taxpayers
As a basic rate taxpayer, even though there will be no extra tax to pay, you must complete a Self Assessment tax return. Moreover, it would need to show how much income you received from the ‘interest in possession’ trust.
You should be credited for the tax paid on your behalf by the trustee(s). Thus, HM Revenue and Customs (HMRC) will not be taxing the income twice.
Higher Rate Taxpayers
You will have to pay extra tax if you are in the higher rate taxpayer bracket. It will be the difference between the tax amount paid by the trustees and the total amount that higher rate taxpayers are liable for (usually calculated through Self Assessment).
How to Reclaim Tax on Trusts
As a rule, the tax that you will be reclaiming from HMRC will relate to:
- Dividends (another section explains how dividends are taxed)
- Income from trade and property (if the rules for tax on savings interest apply to you)
- Savings interest (the GOV.UK website has more information about the tax-free allowances on property and trading income)
Using an allowance against some other income source means your ‘available allowance’ (the amount left) will be reduced’.
You will be able to reclaim all the tax paid if the amount of income you receive is not more than your available allowance. Thus, you can only claim the tax paid on your available allowance if the income you get is higher.
Reclaiming Tax on Trusts Example:
The dividend income from a trust paid you £10,000 in a tax year when the dividend allowance was £2,000. Even though you already used your personal allowance, you do not get any other dividend income in that particular tax year.
The trustee paid £750 tax on the dividends (£10,000 x 7.5%). Hence, you would be able to reclaim the tax paid on your behalf by the trustee for an amount equal to your available dividend allowance (e.g. £2000 x 7.5% = £150).
Self Assessment taxpayers should calculate the repayment as part of the standard return. If not, you should use form R40 to reclaim the tax (making separate claims for each tax year).
Non Resident Trust UK Tax
It is not uncommon for some, or all, of the trustees of a trust not to be resident (domicile) in the United Kingdom for tax purposes. You can read detailed guidance about non-resident trusts and the rules for taxation.
Settlor-Interested Discretionary Trusts
The rules are simple if a settlor-interested trust is a discretionary trust. If so, HMRC will treat payments made to the spouse or civil partner of the ‘settlor‘ as being taxed at 45%.
Even though there would be no more tax to pay, you would not be able to claim back tax credits (like payments made from certain other types of trusts).
If a Pension Pays a Lump Sum into a Trust
Payments are taxed at 45% if a pension scheme pays into a trust – such as when the pension holder has passed away. In this case, the beneficiary will also be taxed if they receive a payment funded by the lump sum.
You can use your Self Assessment tax return to claim back the tax paid on the original lump sum (or form R40). The trust will confirm how much you need to report (usually higher than the amount you received).
Note: Another guide explains more about tax on a private pension you inherit and what happens if you paid too much tax.
Related Help Guides
- Trusts and Inheritance Tax: When is IHT due?
- Trustee responsibilities for reporting and paying tax on behalf of a trust.
- Trusts for vulnerable beneficiaries (e.g. children, disabled people).
Important: Another section contains extra information about the different types of trust and how some benefit specific situations and age groups more than others.