Definitions
Taxes:
CGT – Capital Gains Tax
IHT – Inheritance Tax
Trust Definitions:
Beneficiary – a person or charity who is entitled to benefit in some way from assets within a trust.
Discretionary Trust – a trust where it is up to the trustees to decide who out the trust beneficiaries may receive payments of capital or income, and how and when such payments are made.
Relevant Property Trust – a trust falling within the Relevant Property Tax regime. This will include most trusts created by Will or by the Settlor during their lifetime, except for some trusts for vulnerable or disabled beneficiaries, some trusts for children set up by their parent’s Will, Life Interest Trusts and Rights of Occupation created by Will, and bare trusts.
Settlor – the person who creates a trust by transferring money or assets to trustees.
Trustee – The person (or in some cases company) appointed to hold and administer trust assets.
Capital Gains Tax
The trust can be liable for Capital Gains Tax which applies when an asset such as a property or an investment is sold or disposed of at a higher value than the trust acquired it (a gain). The trustees are responsible for checking whether a disposal of an asset must be reported to HMRC and submitting the tax return.
Gains are calculated by reference to the market or sale value of the asset at the date the trust disposed of it, compared to the value at the date the trust acquired it. Certain deductions are allowable to reduce the gain.
The annual allowance for trusts is half of that of an individual – currently (2025-2026) £3,000 (£1,500 for trusts). If the net gain exceeds the annual allowance then tax is payable at 24% (from October 2024 on).
If a beneficiary of the trust is occupying a property owned by the trustees as their main home then the trust can mitigate CGT by using the main residence relief provisions. However there is no rebasing of asset values on the death of a discretionary beneficiary.
Any investments owned by the trustees can be carefully managed to reduce this tax burden.
Any transfer of an asset out of the trust may give rise to a liability if there has been a substantial gain prior to distribution though in some circumstances holdover relief may apply.
The tax rates and allowances are subject to change by the government.
Income Tax
The trustees are also responsible for paying tax on any income received by the trust. Trustees do not have the benefit of any personal allowance.
As from 6 April 2024, if the trust’s income is below £500 for the whole tax year, no tax is payable. If income exceeds £500 in a tax year all the income is taxed at 39.35% (dividend income) or 45% (all other types of income).
These rates are subject to change by the government.
If income is distributed during the year, the beneficiary who receives the income may claim back the extra tax paid by the trust, if they are a non tax or basic rate tax payer. Therefore, careful planning can mitigate the additional income tax burden and distributions of the trust income can use up the personal allowances of young beneficiaries who have no other income.
If the Settlor of the trust or their minor child can benefit from the trust fund, then the trust income will be taxed as though it belongs to the Settlor. This is a complex area and the trustees may need specialist tax advice.
