Contact Us

Follow Us

The Taxation of Trust Income and Gains

‘’In the land of tax, you’re running across a minefield, so you need to keep a close eye out and be careful where you tread.’’

I didn’t know I had to pay Capital Gains Tax on Trusts?

 Like most tax situations, they can be complex and challenging to understand.

Trusts play a big part in how to avoid inheritance tax, so often, inheritance tax planning advice will include information on trusts and how they fit in.

What most people won’t tell you is about how the trusts are taxed!

Just a couple of things to consider are listed below;

Capital Gains Tax might be payable when:

  • Assets are put into a trust
  • Assets are taken out of a trust
  • A beneficiary gets some or all of the assets in a trust

That being said, the trustees (the people who take responsibility for managing money or assets that have been set aside in a trust) only have to pay Capital Gains Tax if the total taxable gain is above the trust’s tax-free allowance.

This is called the annual exempt amount and is stated below.

  • 2021/2022 – £6150 (half the ordinary person’s tax-free allowance!)

So, to make a point….

Consider this, in 2021/2022, a trust’s tax-free allowance is £6,150. If a settlor has set up two trusts, each trust will get an equal tax-free allowance of £3,075.

If a settlor has set up five or more trusts, the exempt amount is capped at £1,200 per trust. So each trust would have a tax-free exemption of only £1,200!

That is more than 1/10th less than what the ordinary person in the UK is entitled to!

This could have a massive impact if you are uninformed or unprepared.

Just these facts alone, on top of working out how is inheritance tax calculated is going to be challenging. You or one of your loved ones could be losing out on your time and financially!

If this has caught you unaware, or you’re in a situation where this hits home, why not do something about it?

I didn’t know I had to pay Income Tax on Trusts?

Yet again, like most tax situations, they can be complex and challenging to understand.

There are potentials for paying inheritance tax by instalments, but with income tax on trusts, it’s slightly different.

To give you a bit of an idea…..

Different types of trust income have different rates of Income Tax.

Each type of trust is taxed differently. Trusts involve a ‘trustee’, ‘settlor’ and ‘beneficiary’.

To keep it simple….

  • Trustee = the person who manages the trust.
  • Settlor = the person who creates the trust.
  • Beneficiary = the person to benefit from the trust.

Accumulation or discretionary trusts

Trustees are responsible for paying tax on income received by accumulation or discretionary trusts. The first £1,000 is taxed at the standard rate.

If the settlor has more than one trust, this £1,000 is divided by the number of trusts they have. However, if the settlor has set up 5 or more trusts, the standard rate band for each trust is £200.

The tax rates are below;

Trust income up to £1,000

  • Dividend income = 7.5%
  • All other income = 20%

Trust income over £1000

  • Dividend income = 38.1%
  • All other income = 45%

Speaking of dividends, did you know…

Trustees do not qualify for the dividend allowance. This means trustees pay tax on all dividends depending on the tax band they fall within. No help there then!


Interest in possession trusts

The trustees are responsible for paying Income Tax at the rates below.

Trust income up to £1,000

  • Dividend income = 7.5%
  • All other income = 20%

Bare trusts

If you’re the beneficiary of a bare trust you’re responsible for paying tax on income from it.

You need to tell HMRC about the income on a Self-Assessment tax return.

Something else to think about!

Settlor-interested trusts

The settlor is responsible for Income Tax on these trusts, even if some of the income is not paid out to them. However, the Income Tax is paid by the trustees as they receive the income.

All pretty confusing, I’m sure you will agree….

In a nutshell, if you need some help understanding the taxation of trust income and gains, there is only one place to go…..

Get yourself in the know with help from iht planning specialists for some specialist inheritance planning advice. Easy! We can answer any questions you may have about how inheritance tax is calculated or how to avoid paying capital gains tax on inherited property. 

To learn more about iht planning and use our inheritance tax calculator, get in touch via our form have a chat with us.

See also;



Leave A Comment