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The Taxation of Trusts Can Be Tricky

The Taxation of Trusts Can Be Tricky

Trusts are a valuable financial planning tool, yet the taxation of them can cause problems for students taking the CII exams. Here, we look at the income tax position of the three main types of trust that can be examined in AF1, J02, R03 and potentially in R06 and AF5 as well.

THIS ARTICLE IS RELEVANT TO EXAMINABLE TAX YEAR 2019/20.

In future articles, we will consider the capital gains tax and inheritance tax treatment.

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Bare Trust
Trustees act as nominees Beneficiary is absolutely entitled to the assets – or would be if they were aged 18
Interest in Possession
Where one or more beneficiaries has the right to the income arising in the trust
Discretionary Trusts
The trustees have discretion as to who gets income and capital

  • Income belongs to the beneficiary

  • Taxable at beneficiary’s rates

  • Unless money from parent in which case taxed on the parent if over £100pa and beneficiary unmarried minor

  • Beneficiary liable for tax, not trustees

  • Beneficiary must include on tax return


  • Trustees have no personal allowance/or PSA/DA

  • Trustees liable for basic rate tax only

  • Savings & other income = 20%

  • Dividends = 7.5%

  • Not entitled to tax relief on expenses/are deducted prior to distribution

  • Expenses set against income in order: UK dividends, foreign dividends, savings, other income

  • If settlor interested taxed on settlor (can reclaim from trustees)


Beneficiary:



  • Trustees complete R185 – shows net of tax figures

  • Beneficiary adds trust income to own income

  • Entitled to tax credit for tax deducted from trust income

  • Beneficiary may reclaim/pay extra at own rates

  • Sometimes trust income is paid directly to beneficiary instead of going through trustees’ hands – HMRC then assesses individual

  • Beneficiary can use their PSA and/or DA


  • Trustees have no personal allowance/no PSA or DA

  • Trustees have standard rate band (£1,000 2019/20)

  • Taxed at 7.5% (dividends) or 20% (all other income) 

  • Divided by the number of trusts created by settlor

  • Minimum £200 per trust

  • Thereafter trustees taxed at 38.1% (dividend) or 45% (all other income)

  • Distributions subject to a 45% tax credit

  • If income accumulated, then no tax liability for beneficiary

  • Trustee’s expenses are allowable in working out income chargeable, but income relieved remains charged at 7.5% or 20% – expenses are grossed up

  • Expenses set against dividend income, then savings income and finally other income


Beneficiary:



  • Distributions to beneficiaries deemed to be trust income and carry 45% tax credit

  • Non-taxpayers reclaim 45%

  • Basic rate taxpayers reclaim 25%

  • Higher rate taxpayers reclaim 5%

  • Additional rate taxpayers – no reclaim

  • Beneficiary cannot use PSA or DA as ‘trust income’

This is part 1 of a 2-part series. Here, we talk about the CGT and IHT treatment of trusts.

Grab the resources you need!

If you’re studying for your CII R03 exam, and you’re aiming for a comfortable pass, you need to get all the practice you can. Grab our free taster to try out one of Brand Financial Training’s resources for yourself.  Click the link to download the R03 mock paper taster now!

Click here to download our free taster mock paper for CII R03

Alternatively, you can download the taster for AF1AF5, J02, or R06 if you’re preparing for one of those exams.