Trusts and Taxation Issues
- February 3, 2025
- Posted by: Best4business Team
- Categories: News, Tax

In simple terms a trust arrangement exists whenever there is a separation between legal title and beneficial ownership.
A trust is created when the Settlor transfers assets to a Trust that is run by the Trustees. The Trustees hold legal title to the assets but manage income and capital for the benefit of the beneficiaries. While a Settlor can appoint themselves as a Trustee, it is common for family trusts to have the Settlor acting alongside professionals, such as family solicitors working as Trustees. A beneficiary is an individual entitled to benefit from the income or assets held in the trust.
Reasons for Establishing Trusts
- Protection of Younger Beneficiaries: Trusts are useful when the intended beneficiary is too young to manage the asset. By transferring assets to a trust, the Settlor can retain control while ensuring the assets benefit the child at an appropriate time.
- Tax Advantages: A key tax advantage of transferring assets into a trust is that they are not included in an individual’s estate for Inheritance Tax (IHT) purposes.
- Guaranteeing Property Succession: Trusts allow Settlors to ensure the assets remain within the family, with the potential to pass down to future generations.
- Concealing Beneficial Ownership: Some individuals may wish to conceal the beneficial ownership of property, such as shares, which can be achieved through a trust while maintaining control over the asset or company.
Main Types of Express Private Trusts
- Discretionary Trusts: In these trusts the Trustees have discretion over how income and capital are distributed to beneficiaries. Beneficiaries do not have an automatic right to income or capital and there is no legal entitlement under the trust’s constitution.
- Interest in Possession Trusts (IIP): With an IIP the Trustees must distribute the income from the trust to nominated beneficiaries. Trustees cannot accumulate income within the trust.
- Accumulation and Maintenance Trusts (A&M): This hybrid trust blends aspects of both discretionary trusts and IIPs. A&M trusts are often set up by parents or grandparents for the benefit of their children or grandchildren.
- Bare Trusts: In a Bare Trust, the Trustee holds the property on behalf of the beneficiary, who has full control over the asset. The Trustee acts according to the beneficiary’s instructions. For example, a parent might set up a bank account for a child, with the child entitled to the capital and any interest earned.
- Charitable Trusts: Most charities are structured as charitable trusts. These are discretionary trusts whose funds must be used for charitable purposes. As registered charities they are exempt from taxation.
- Protective Trusts: Protective trusts offer beneficiaries rights similar to IIPs but with additional safeguards. The rights to income are terminated in the event of the beneficiary’s bankruptcy or attempts to sell or transfer their interest.
Other Key Points
- Registration with HMRC: Trusts must be registered with HMRC within 90 days of becoming liable to UK tax.
- Taxation of Trusts: If the Trustees are UK residents the trust will be taxed on worldwide income and gains.
- Mixed Resident Trustees: If a trust has mixed-residency Trustees (both UK and overseas), the trust will be considered a UK trust if the Settlor was UK resident or domiciled at the time of its creation.
- Tax Allowances and Rates: Personal allowances do not apply to trusts, and rate bands are not relevant. Trusts are also not entitled to savings and dividend allowances.
- Inheritance Tax (IHT) for Relevant Property Trusts: As the assets in a trust do not form part of an individual’s estate for IHT purposes, there are separate IHT charging systems for relevant property trusts. These include:
- Principal Charge: A charge calculated at the 10-year anniversary of the trust’s creation.
- Exit Charge: This arises when there is a reduction in the trust’s relevant property.
Income Tax Rates for Trustees
- IIP Trusts: Pay income tax at the basic rate of 20% on savings and non-savings income, and 8.75% on dividend income.
- Discretionary Trusts: Pay income tax at the highest rates of 45% on savings and non-savings income, and 39.35% on dividend income.
- Discretionary Trust Allowance: The first £1,000 of discretionary trust income is charged at the basic rate of 20% for savings and non-savings income, and 8.75% for dividends.
- Beneficiaries: Beneficiaries receive income after tax is deducted. They can claim a credit for the tax paid when filing their own tax returns.
Speak to an Expert
This article provides a basic overview of the trust rules applicable at this time and should not be solely relied upon to make decisions; seeking professional advice is strongly recommended. If you are unsure whether a trust arrangement is right for you, or need assistance with setting one up, or managing its reporting, please reach out to us. We are happy to help.