What is a trust? How are UK trusts taxed? What types of trust are there?
This is a freeview 'At a glance' guide to UK trusts. For trust registration see Trust Registration Service: At a glance
At a glance
At a glance
- A trust is created by a settlor, who transfers property into a trust, where it is held and administered by trustees.
- A trust is generally created by deed; it sets out the terms, the beneficiaries and the trustees’ powers.
- Trusts can be settlor interested or non-settlor interested. A settlor interested trust is where the person setting up the trust can benefit from the trust either directly or where their spouse or civil partner is a beneficiary.
Most trusts set up after 2006 are relevant property trusts subject to potential IHT charges under the 'relevant property regime':
- When assets are transferred into trust: Chargeable Lifetime Transfers or CLTs.
- When payments are made out of the trust to beneficiaries: exit or proportionate charges.
- On each ten-year anniversary of the trust: principal, periodic or ten-year charges.
Special trusts for disabled persons, bereaved children and those between the ages of 18 and 25 are not under the relevant property regime and have their own rules. See UK Trusts.
Discretionary Trusts (DT)
A discretionary trust will have a wide class of beneficiaries, often unnamed and can include unborn children.
- As a beneficiary of a DT you do not have any outright entitlement to the income or assets of the trust. It is entirely up to the trustees who benefits from the trust and by how much.
- As trustee of a DT you may have full discretion over the trust income and assets, depending on the trust deed.
Interest In Possession (IIP) or life interest trusts
Where there is an Interest In Possession or life interest:
- If you hold that interest you are the life tenant and have a right to the present enjoyment of the trust income or assets of the trust.
- If have an immediate right to the income of the trust to the exclusion of all others, it is your income taxable upon you accordingly.
- You may also have a right to use trust assets, such as living in trust property, until your death or some other time as specified by the will or trust deed.
- If you are a trustee you have no discretion in dealing with the trust income; you must pay it to the life tenant.
These are informal types of trust. The income and capital of a bare trust belongs to the beneficiary; as a trustee you have control but if the beneficiary asks for the assets to be transferred to them it is hard for you to refuse.
A UK trust is one which:
- Is controlled by UK trustees or
- If the settlor was UK domiciled at the time of the settlement, has any UK trustees at all.
As an individual trustee, your residency is determined according to the Statutory Residence Test.
Inheritance Tax (IHT)
- A lifetime gift to a trust is a Chargeable Lifetime Transfer (CLT) for IHT and subject to an immediate tax charge at 20%, unless:
- Reliefs apply.
- It is within the donor's (settlor's) Nil Rate Band (NRB).
- It is excluded property.
- If you are a settlor and you retain an interest in the trust, see UK trusts for how this will affect the value of your estate and the IHT due when you die.
- Reliefs such as Agricultural Property Relief (APR) and Business Property Relief (BPR) can apply.
- If you are a settlor and you were Non-UK domiciled when you set up the trust, excluded property includes foreign property.
- If after 6 April 2017 you became UK domiciled or deemed domiciled and property is added to a trust you created when non-domiciled, this will not be excluded property.
- The Ten-year charge is based on the value of trust property on the day before the tenth-anniversary date.
- There will be an IHT charge if this value exceeds the nil-rate band on the anniversary date.
- The rate of IHT charged is up to 6%.
When assets leave the trust, e.g. when distributions are made to beneficiaries, an exit charge is due:
- The charge is based on the capital value leaving the trust on the exit date.
- The rate of IHT is subject to a complex calculation factoring in the last ten-year charge.
- In certain circumstances, there is no exit charge. See UK trusts for more details.
If you are a trustee, you and the other trustees have responsibility for paying the tax on an exit; you can delegate this responsibility to the beneficiary if you wish.
See Trusts & Estates: Exit charge reporting requirements for what happens to the rate of tax if the trustees agree to pay the exit charge.
IHT reporting requirements
- Exit charges need to be reported to HMRC using form IHT100.
- The deadline for filing the return and paying the tax is six months after the end of the month in which the event occurs.
- Interest accrues on late payments.
Trustees are required to submit forms IHT100 even if there is no tax due unless certain conditions are met.
- See UK trusts for what these conditions are.
- UK resident trusts are taxed on their worldwide income.
- Discretionary trusts are taxed on their income at the additional rate of tax.
- The tax paid is pooled; when income is paid out to beneficiaries it comes with a tax credit.
- Beneficiaries can reclaim the difference between their own marginal rate and the tax credit.
- See UK trusts for the trustees' obligations to beneficiaries regarding the tax paid on trust income and in the situation where the tax pool does not cover the tax credit due when a distribution is made to a beneficiary.
- As trustees of a DT you can deduct certain expenses of managing the trust e.g. bank charges.
If you are a UK resident beneficiary with an IIP:
- The income is taxed on you as your own income. You must include it on your Self Assessment return.
If you are the settlor and you have retained an interest in the trust:
- During your lifetime the income of the trust is taxed on you with no deduction for trust management expenses.
Capital Gains Tax (CGT)
- Trustees of UK resident trusts are taxable on worldwide trust capital gains.
- Trustees have a reduced annual exemption.
- A transfer into and out of trust is deemed to be at market value for CGT purposes.
- See UK trusts.
As a trustee you can claim certain CGT reliefs on trust gains, subject to certain conditions. These include:
- Business Asset Disposal Relief (BADR) (previously Entrepreneurs Relief)
- Holdover Relief
- Private Residence Relief (PRR)
Holdover Relief is important:
- A claim can be made on a transfer into or out of a trust.
- Assets do not need to be business assets.
- There are restrictions if the trust is settlor interested. See UK trusts.
Reporting requirements for Income Tax and Capital Gains Tax
As a trustee, you are required to file Self Assessment returns for the trust in respect of income and capital gains.
- Unless the only source of income is savings interest and the tax liability is below £100 (for 2016-17 to 2023-24).
- Unless all income is mandated to a beneficiary. See UK trusts.
Stamp Duty Land Tax (SDLT)
A transfer into trust is a gift with no consideration; property can be put into or taken out of a trust with no SDLT charge unless the trustees/beneficiaries take on any borrowing attached to the property.
Useful guides on this topic
What is a trust? What types of trust are there? How are UK trusts taxed?
When is a trust non-resident? What are the UK tax implications of a non-resident trust? What are the UK tax implications for any beneficiaries? What are the UK administrative requirements for a non-resident trust?
Trusts & Estates: Ten-year charge reporting requirements
What is the ten-year charge (or principal or periodic charge) and when does it apply?
Trusts & Estates: Exit charge reporting requirements
What is an exit charge, or proportionate charge, and when does it apply?
Trusts & Tax planning
What is a trust? How can trusts be used in tax planning? What are the advantages and what are the pitfalls?
Trust Registration service
From July 2017 certain trusts must be registered with HMRC under an online registration system. The scope of this has gradually widened.
Trusts must register where they:
- Require a Unique Taxpayer Reference (UTR).
- Become liable for a tax such as: Income Tax, Capital Gains Tax, Inheritance Tax, Stamp Duty Land Tax, Stamp Duty Reserve Tax, Land and Buildings Transaction Tax or Land Transaction Tax. This applies to both UK and non-UK trusts.
- Are a UK express trust (even without a tax liability), unless specifically excluded.
- Are a non-UK express trust with UK property or connections.
For detailed registration requirements and deadlines, see Trust Registration Service.
- Registrable new trusts and existing trusts that require registering for the first time must do so within 90 days.
- The online record must be kept updated for changes in the beneficiaries and trustees.
- Agents can register to use the service here.
- Late filing penalties apply.
- Personal representatives of complex estates must use the TRS to register the estate with HMRC.