Trust Income Tax Rates UK (2026): Discretionary Trust 45%, Interest in Possession, Vulnerable Beneficiary and SA900

A discretionary trust (also called an accumulation and maintenance trust or a relevant property trust for IHT purposes) pays income tax on its income at the trust rates: (1) THE TRUST RATES (INCOME TAX ACT 2007 ss.479-484): (a) Non-dividend income (interest; rental income; employment income of the trust): taxed at 45% (the trust rate) — one of the highest income tax rates in the UK; (b) Dividend income: taxed at 39.35% (the dividend trust rate); (2) THE STANDARD RATE BAND: the first slice of trust income is taxed at the basic rate (20% on non-dividend income; 8.75% on dividends) rather than the trust rate. The standard rate band for trusts: from 2024/25 onwards, the standard rate band was reduced from £1,000 to £500 per tax year. For 2024/25 and 2025/26, the first £500 of trust income is taxed at the basic rate (20%/8.75%); income above £500 is taxed at 45%/39.35%; (3) THE STANDARD RATE BAND IS NOT PERSONAL — IT IS SHARED: unlike personal allowances, the trust standard rate band is shared between all trusts created by the same settlor. If a settlor creates multiple trusts, the £500 is divided equally between them (subject to a minimum of £100 per trust). A settlor with 5 trusts has only £100 standard rate band per trust; (4) NO PERSONAL ALLOWANCE: a discretionary trust does not benefit from the personal allowance (currently £12,570). The trustees pay tax on the first £1 of income (subject to the standard rate band). This is fundamentally different from an individual who pays no tax on income below the personal allowance; (5) THE TAX POOL: as trustees pay income tax on the trust's income, they build up a 'tax pool' — a pool of tax credits that can be used to match the 45% tax credit attached to trust distributions. The tax pool is carried forward year by year. When the trust distributes to beneficiaries, the distribution is made net of a 45% tax credit — which beneficiaries can set against their own income tax liability or reclaim if they are non-taxpayers.

An interest in possession (IIP) trust has a beneficiary who has a right to receive the income of the trust as it arises. The income tax treatment is fundamentally different from a discretionary trust: (1) THE IIP BENEFICIARY IS TREATED AS ENTITLED TO THE INCOME: under general trust law and tax law, the income of an IIP trust is treated as the income of the life tenant (the beneficiary with the interest in possession) — NOT the income of the trustees. The beneficiary is taxed on the trust income at their own personal income tax rates, not the trust rates; (2) HOW THE TRUST COLLECTS AND PASSES ON INCOME: in practice, the trustees receive the income first and pay basic rate tax on it (20% on non-dividend income; 8.75% on dividends through HMRC's dividend tax treatment). The trustees then pass the net income to the beneficiary; (3) THE BENEFICIARY'S TAX POSITION: the beneficiary receives the net income with a tax credit for the basic rate already paid. They report the gross income on their own self-assessment tax return (SA100) and: (a) if they are a basic rate taxpayer — no further tax due; (b) if they are a higher rate taxpayer (40%) — pay the additional 20% on the gross amount; (c) if they are an additional rate taxpayer (45%) — pay the additional 25% on the gross; (d) if they are a non-taxpayer (income below personal allowance) — they can reclaim the basic rate tax already paid; (4) THE R185 CERTIFICATE: the trustees must issue an R185 (Trust Income) certificate to the life tenant beneficiary annually. The R185 shows the gross income, the tax already deducted, and the net income paid. The beneficiary uses the R185 to complete their tax return; (5) MULTIPLE BENEFICIARIES WITH INCOME ENTITLEMENTS: where there are multiple life tenants (e.g. husband and wife each entitled to half the income), each receives their proportionate share and each receives an R185 for their share. Each beneficiary is taxed individually at their own marginal rate.

The vulnerable beneficiary election is a special income tax (and CGT) regime that allows a qualifying trust to be taxed as if the income and gains were the beneficiary's own — rather than at the trust rates: (1) QUALIFYING TRUSTS: the vulnerable beneficiary regime (Income Tax Act 2007 ss.30-43) applies to: (a) a qualifying disabled person's trust (a trust that meets the IHTA 1984 s.89 conditions — i.e. a disabled person's trust under which the disabled person is the only current beneficiary); (b) a bereaved minor's trust (a trust for a minor who has lost a parent, where the minor becomes entitled to the capital at 18); (2) THE ELECTION: trustees annually elect for the vulnerable beneficiary regime on their SA900 trust tax return. The election can be made or revoked each year; (3) THE EFFECT — SPECIAL INCOME TAX TREATMENT: under the vulnerable beneficiary regime: (a) the trust's income is computed as if it were income of the qualifying beneficiary — at the beneficiary's own income tax rates; (b) if the beneficiary is a non-taxpayer (income below personal allowance), the trust effectively pays no income tax on trust income attributed to that beneficiary; (c) if the beneficiary has a lower marginal rate than 45%, the trust pays tax at that lower rate; (d) the annual exempt amount for CGT purposes is the beneficiary's own AEA (£3,000 in 2026) — not the reduced trustee AEA (half the personal AEA); (4) CALCULATING THE TAX SAVING: the election calculates the 'special income tax amount' — the difference between what the trust would pay without the election and what it would pay at the beneficiary's personal rates. The trustees claim a reduction in their tax liability equal to this difference; (5) WHO THIS MATTERS MOST FOR: disabled beneficiary trusts where the beneficiary has low personal income (e.g. reliant on means-tested benefits) benefit most — the trust income may be entirely free of income tax if the beneficiary's own income is below the personal allowance. Over a long-lived trust, this can save substantial amounts.

Trustees of UK trusts that have income or gains have specific filing and reporting obligations: (1) SA900 — TRUST TAX RETURN: trustees must register the trust for self-assessment if the trust has: (a) income above the standard rate band (£500 in 2024/25); (b) capital gains; (c) income that is passed to beneficiaries. An SA900 trust and estate tax return must be filed annually by 31 January (online) or 31 October (paper) following the end of the tax year. Trustees are personally liable for the trust's income tax and any interest/penalties for late filing; (2) THE TAX POOL — HOW IT WORKS: the tax pool is an account of the income tax that the trust has paid and has available to match distributions to beneficiaries. Each year: (a) Tax paid on trust income (at 45% or 39.35%) is credited to the tax pool; (b) When income is distributed to a beneficiary (as a payment accompanied by a tax credit of 45%), the 45% tax credit is debited against the pool; (c) If the pool has insufficient credits to match a distribution, the trust must pay the shortfall to HMRC; (d) Undistributed income builds up the pool year on year; (3) THE R185 CERTIFICATE: when trustees make an income distribution to a discretionary trust beneficiary, they must issue an R185 (Trust Income) certificate showing: (a) the net amount paid; (b) the gross amount (net amount ÷ 0.55 for non-dividend income); (c) the tax credit (45% of gross); The beneficiary uses the R185 to complete their self-assessment tax return. Beneficiaries who are non-taxpayers can reclaim the 45% tax credit from HMRC — making discretionary trust distributions valuable for lower-income beneficiaries; (4) TRUST REGISTRATION SERVICE: as noted in the trustee duties guide, all express trusts must register on the Trust Registration Service regardless of whether they have income or gains — including non-taxable trusts (subject to specific exceptions). Failure to register carries HMRC penalties; (5) CHARITABLE TRUSTS: charitable trusts are exempt from income tax on most income — provided the income is applied for charitable purposes. Charitable trusts must register with the Charity Commission (for trusts with income over £5,000) and file annual accounts and returns with the Commission.

Many trusts hold UK property (rental income) or investment portfolios (interest and dividends). The tax treatment depends on the trust type: (1) RENTAL INCOME IN A DISCRETIONARY TRUST: (a) rental income (net of allowable expenses — mortgage interest on commercial property; maintenance; letting agent fees; insurance) is trust income; (b) taxed at 45% on the first pound above the £500 standard rate band; (c) landlord filing obligations still apply — rental income must be reported on SA900; (d) FINANCE ACT 2017 MORTGAGE INTEREST RESTRICTION: individual landlords have been phasing in a restriction on mortgage interest deductions (replaced by a 20% tax credit). Trusts were NOT directly affected by the individual Finance Act changes in the same way — specific advice is needed on the position for trust landlords; (2) RENTAL INCOME IN AN IIP TRUST: (a) rental income is passed to the life tenant as their income; (b) trustees deduct basic rate tax (20%) and pass the net to the life tenant with an R185; (c) life tenant reports gross rental income on their own tax return; (d) a higher-rate-taxpayer life tenant pays additional tax at 40% or 45% on the gross; (3) INVESTMENT INCOME — DIVIDENDS: (a) UK dividend income received by a discretionary trust: basic rate (8.75%) on the first £500 of trust income; 39.35% above the standard rate band; (b) there is no dividend allowance for trusts (the £500 dividend allowance applies to individuals only); (4) INTEREST INCOME: (a) bank interest, gilt interest, and bond coupon payments received by a discretionary trust: 20% on the first £500; 45% above the standard rate band; (b) an IIP trust: interest passed to the life tenant with 20% basic rate deducted; (5) PRACTICAL IMPLICATION — ACCUMULATION TRAP: a discretionary trust that accumulates all income (not distributing to beneficiaries) pays 45% income tax year by year. A large investment portfolio in a discretionary trust can be heavily eroded by ongoing 45% income tax. Regular distributions to lower-rate beneficiaries — combined with the beneficiary reclaiming the tax pool credits — can improve the overall tax efficiency, but this requires active annual management.