How Are Trusts Taxed in the UK (2026): Income Tax, CGT & IHT Explained

Income tax for UK trusts depends on the type of trust and the nature of the income. For most discretionary trusts (and accumulation trusts where income is added to capital): (1) The first £500 of income is taxed at the basic rate — 20% on savings interest, 8.75% on dividends, 20% on rental income; (2) Income above the £500 standard rate band is taxed at the 'trust rate' — 45% on interest, rental income, and most other income, and 39.35% on dividend income. The £500 standard rate band is shared across all trusts created by the same settlor. If a settlor has created multiple trusts, the £500 is divided equally — 5 trusts share £100 each; 6 or more trusts each get the minimum (£100). For interest in possession trusts (also called 'life interest trusts' where a beneficiary has a right to current income): the beneficiary is treated as entitled to the income as it arises, and income tax is charged at their personal rates — not at the trust rate. For bare trusts: the beneficiary is treated for all tax purposes (income tax and CGT) as if they directly own the assets. The trust is ignored for income tax and CGT — the beneficiary receives the income as their own and pays tax at their own rates and with their own personal allowance. Trustees must complete the SA900 Trust and Estate Tax Return annually by 31 January (online) or 31 October (paper). If trustees pay tax at the trust rate, beneficiaries who receive distributions are given a tax credit for the trust rate tax already paid — if the beneficiary's personal rate is lower, they can reclaim the difference.

Trustees are liable to CGT when they dispose of trust assets (for example, sell shares, property, or other assets held in the trust). The key rates and rules for trustees are: (1) Rates: trustees pay CGT at 24% on residential property gains (from 6 April 2024 following the Spring Budget 2024 reduction from 28%) and 20% on other assets (shares, commercial property, etc.) — there is no basic rate band for trustees, so all gains are taxed at the higher rate. (2) Annual exempt amount: trustees receive an annual exempt amount (AEA) of £1,500 in 2025/26 — half the individual AEA of £3,000. This applies to each trust separately, though a settlor's multiple trusts share the AEA (divided, with each trust getting a minimum of £300). (3) Hold-over relief (gift relief): when trust assets are transferred to a beneficiary from a discretionary trust, hold-over relief under TCGA 1992 s.260 is available — the gain is 'held over', reducing the beneficiary's acquisition cost. The beneficiary then pays CGT when they eventually sell. (4) Bare trusts: as with income tax, the beneficiary is treated as the direct owner — any CGT on bare trust assets is calculated using the beneficiary's rates and AEA, not the trust rates. (5) Reporting: trustees must report and pay CGT within 60 days of completion for residential property sold by the trust, using the HMRC UK Property Account online service.

Discretionary trusts (also called relevant property trusts) face three IHT charges: (1) Entry charge (IHT on setting up the trust): when assets are transferred into a discretionary trust during the settlor's lifetime, the transfer is a chargeable lifetime transfer (CLT). If the cumulative CLTs exceed the nil-rate band (£325,000), IHT is charged at 20% on the excess (half the death rate of 40%). If the CLT is below the NRB, there is no immediate IHT charge, but the transfer uses up the NRB against future CLTs and the 7-year running total. On death, if the settlor dies within 7 years of making the CLT, further IHT at up to 40% (minus the 20% already paid) may be due. (2) Ten-year anniversary charge (periodic charge): every 10 years from when the trust was created, IHT is charged on the trust's value at the rate of 6% of the value above the NRB (the 'nil-rate band' at that time, less any chargeable transfers in the previous 10 years). The effective maximum rate is 6%. For a trust with £1 million in assets and a £325,000 NRB: tax = 6% × (£1,000,000 - £325,000) = 6% × £675,000 = £40,500 every 10 years. (3) Exit charge (proportionate charge): when assets leave the trust — whether by distribution to beneficiaries, appointment out, or winding up — a proportionate exit charge applies. The rate is based on the effective rate at the last ten-year charge, scaled by the proportion of the 10-year period that has elapsed since then (from 0% if distributed immediately after a ten-year charge to the full effective rate just before the next one). These charges apply to most trusts in wills (called 'relevant property trusts') and to most lifetime discretionary trusts.

The IHT treatment of interest in possession trusts (also called 'life interest trusts') depends on when the trust was created and whether the interest arose before or after 22 March 2006. Pre-22 March 2006 interest in possession trusts (old-law trusts): the beneficiary with the right to income (the 'life tenant') is treated as owning the trust assets for IHT purposes. The assets are included in the life tenant's estate on death; the life tenant's nil-rate band and reliefs apply. These trusts do not face the 10-year charge. Post-22 March 2006 interest in possession trusts: since the Finance Act 2006 reforms, most new interest in possession trusts created by living settlors are treated as relevant property trusts subject to the 10-year and exit charges. However, there are exceptions: (a) Immediate Post-Death Interest (IPDI): an interest in possession created by a will that takes effect immediately after death is an IPDI — treated as if the beneficiary owns the assets; included in their estate; not subject to the 10-year charge. A typical IPDI is a right for a surviving spouse to live in the family home for life, with the property passing to children on the spouse's death; (b) Disabled person's interest: if the beneficiary of the trust is a disabled person under TCGA 1992 s.89, the trust is treated as the disabled person's for both IHT and CGT; (c) Bereaved minor's trust (trust for bereaved minors, TFBM): exempt from the 10-year charge if the minor will become absolutely entitled at 18. These distinctions are critical in will drafting — an IPDI in a will is IHT-efficient in ways that a post-2006 discretionary trust is not.

The Trust Registration Service (TRS) is a register maintained by HMRC under the 5th Anti-Money Laundering Directive (AMLD5) and its UK equivalent regulations (The Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2019). Most UK trusts must register on the TRS, regardless of whether they have UK tax liabilities. Trusts that must register: all express trusts with UK tax liabilities (including income tax, CGT, IHT, SDLT, stamp duty reserve tax); all UK express trusts without a tax liability since 6 October 2020 (with some exceptions). Trusts that are exempt from registration include: statutory trusts arising on intestacy (not express trusts); trusts implied by law; certain charitable trusts registered with the Charity Commission; trusts with a maximum 2-year administration period used solely to administer an estate; trusts holding only life insurance policies that pay out on death or terminal illness and do not have an investment component; trusts created to hold employer pension schemes regulated by The Pensions Regulator; registered UK charities. Deadline for registration: existing trusts with tax liabilities must register by 31 January after the end of the first tax year in which they have a liability. Trusts with no tax liability must register within 90 days of creation if created on or after 1 September 2022. Non-UK trusts that acquire UK land or have a UK tax liability must also register. Penalties for non-registration: up to £5,000 for deliberate non-compliance; £100 for failure to notify changes. Registration is done online via HMRC's TRS portal at gov.uk/register-a-trust-your-organisation.

A bare trust (also called a 'simple trust' or 'nominee holding') is the simplest form of trust — the trustee holds assets for a single, absolutely entitled beneficiary who can demand the assets at any time (if they have legal capacity). The tax treatment of bare trusts is fundamentally different from discretionary trusts: (1) Income tax: the beneficiary is treated as the direct owner of the assets for income tax. All income generated by bare trust assets is taxed at the beneficiary's personal rates using the beneficiary's personal allowance and tax bands — not at the 45% trust rate. A bare trust held for a minor child whose parent is the settlor is treated as the parent's income for income tax (the parental settlement rules prevent parents from using bare trusts to divert income to their lower-taxed children); (2) CGT: the beneficiary is treated as the direct owner for CGT — gains are taxed at the beneficiary's rates (18% or 24% for residential property; 10% or 20% for other assets) with the beneficiary's own annual exempt amount (£3,000 in 2025/26); (3) IHT: assets in a bare trust are treated as belonging to the beneficiary for IHT. They are included in the beneficiary's estate on death — but they are NOT subject to the 10-year IHT charge or the exit charge, because the beneficiary is absolutely entitled; (4) No entry charge: when a bare trust is created, the transfer is a gift by the settlor to the beneficiary — it is a PET (potentially exempt transfer), not a CLT. IHT-free after 7 years. Because of their tax simplicity, bare trusts are commonly used for: minor children's savings (JISA, saving accounts held on trust until 18); nominee share accounts; solicitors holding funds on behalf of clients.

A trust created in a will (a 'will trust' or 'testamentary trust') is generally taxed in the same way as the equivalent lifetime trust, with one important exception: the administration period. Between the date of death and the point at which assets are formally transferred into the trust (the administration period), the assets are held by the personal representatives (executors) and taxed under the estate rules rather than the trust rules. The key estate administration tax rules: (1) Income tax: the estate pays income tax at 20% on savings income and rental income (estates do not have a personal allowance); 8.75% on dividends; (2) CGT: personal representatives pay CGT at 24% on residential property gains and 20% on other assets — with the full annual exempt amount (£3,000) in the first tax year after death only; (3) IHT: IHT is calculated at death using the estate's total assets including any trust created immediately on death. Once the will trust is formally constituted (assets transferred to trustees), the trust becomes subject to its own tax regime (income tax at trust rates, CGT at trust rates, IHT charges as applicable). For a will trust that is an Immediate Post-Death Interest trust (IPDI — e.g., a right for the surviving spouse to use property for life): the trust is treated as the life tenant's for IHT (assets in their estate, not subject to ten-year charge). For a discretionary will trust (e.g., a nil-rate band discretionary trust): subject to the full relevant property regime including ten-year and exit charges. Will trusts should be reviewed regularly by the trustees with professional advisers — particularly in light of the April 2027 IHT changes.