If you set up a trust to provide for your loved ones financially, it may be required to pay taxes to the UK government. With this in mind, Prestige Tax and Trust Services asks: does a trust pay income tax?
A trust is a legal instrument for managing assets and it can offer protection from taxation. A trust is created by ‘settlors,’ the person or people who move the assets into said trust. It’s managed by trustees, the person or people who legally own the assets held in the trust and who are responsible for managing them on behalf of ‘beneficiaries.’ This is the person or people who benefit from the trust.
Trusts and income tax
Trusts can allow you to safeguard your assets from tax but some generate income, so they’re required to pay income tax. The rate of income tax depends on the type of trust you choose to set up. The type of trust you choose to create will also determine which person will be responsible for paying its tax to HM Revenue and Customs (HMRC). Below, we explain the income tax obligations of several of the main types of trust:
- Bare trust: The beneficiary of a bare trust is responsible for paying its income tax to HMRC. They’re required to inform HMRC of any income the trust has generated on their self-assessment tax return. In general the beneficiaries of a trust may, depending on the type of trust and their income, be able to claim some of the income tax back.
- Interest in possession trust: Trustees pay income tax on these trusts and must do so at two rates; 10% for ‘dividend-type income’ and 20% for other income. If the trustees ‘mandate’ income to the beneficiaries, so it’s revenue goes directly to said beneficiaries, they’re responsible for paying income tax and must include this on their self-assessment tax turn.
- Accumulation or discretion trust: Trustees must pay income tax on these trusts. The first £1,000 is taxed at 10% for dividend-type income and 20% for other income. If you’ve created up to four trusts, the first £1,000 is divided up between them. If you create five or more trusts, the standard rate of tax is charged on the first £200 in per trust. Income tax on income above £1,000 is 37.5% for dividend-type income and 20% for other kinds of income.
- Settlor-interested trust: As the settlor, you’re responsible for income tax on these trusts, but the tax itself is paid out by the trustees as they receive the income. The trustees must complete a Trust and Estate Tax Return, then give you a statement detailing the income of the trust and the tax charged on it. Then you must tell HMRC about the tax trustees have paid on your behalf on your self-assessment tax return.
- Other trusts: There are specific income tax rules for certain other trusts. This includes trusts for vulnerable people. a disabled discretionary trust, parental trusts for children e.g. a child’s trust and non-resident trusts, where trustees aren’t resident in the UK for tax purposes.
Prestige Tax and Trust Services
If you want to utilise a trust to protect your assets from taxation, you need to be aware of the tax obligations of each type of trust. This is why you might want to enlist the help of legal experts such as Prestige Tax and Trust Services if you’re thinking of setting up a trust. Our team has the legal expertise you need to set up a trust to provide income for your loved ones effectively.