Exploring the Basics of Trust Income Tax

What is a Trust?

A trust is a means for individuals to manage their assets (money, investments, land, or buildings). There are several sorts of trusts, each of which is taxed differently. So, if you are planning to begin a trust, it is important to understand the trust income tax rates and laws applicable.

Trusts include the following:

  • the settlor – the one who places assets in a trust
  • the ‘trustee’ – the person in charge of the trust
  • the ‘beneficiary’ – the one who gains from the trust

What is the role of a settlor?

The person who establishes a trust is the one who determines what the assets of the trust should be used for, which is typically outlined in the trust deed. In certain cases, the settlor may also be able to benefit from the assets of the trust, which is known as a settlor-interested trust and has a different set of income tax protocols.

What does the trustee do?

The resources held in a trust rightfully belong to the trustees. Moreover, their job is to:

  • Handle the assets per the settlor’s preferences as stated in the trust deed or will.
  • Manage the trust regularly and pay off any income tax due.
  • Decide how to invest or use the trust’s assets.

If the trustees are altered, the trust can persist. But there must always be at least one trustee.

Beneficiaries

Multiple individuals can benefit from trusts, such as a family or a specific group. These benefits can include solely the income generated from the trust, like when renting out a house held in the trust, or solely the capital, such as when receiving shares held in the trust upon reaching a certain age, or a combination of both the income and capital of the trust.

Why do people set up trusts?

People form trusts for a variety of purposes, including:

  • when someone is too young to conduct their own affairs. 
  • when someone is unable to handle their affairs due to incapacity. 
  • to pass on assets while you are still living. 
  • likewise to pass on assets after you die (a ‘will trust’)
  • If someone dies without a will, the laws of inheritance apply (in England and Wales)

Do I have to pay Tax on the income from a Trust?

The amount of Income Tax paid on trust income varies based on the type of trust. Trusts typically involve a trustee, a settlor, and a beneficiary.

Accumulative or discretionary trusts income tax

Trustees are responsible for paying taxes on income earned through accumulative or discretionary trusts. The usual rate taxes the first £1,000. If the settlor has multiple trusts, they will divide this £1,000 among them. If the settlor has established five or more trusts, the regular rate limit for each trust is £200.

For Trust income up to £1,000

The government will tax dividend type of income at 7.5% and all other income at 20%.

For Trust income over £1,000

The government taxes dividend income at 38.1% and all other income at 45%.

Trustees are not eligible for the dividend allowance. Therefore they have to pay tax on dividend income according to their tax bracket.

Interest in Possession Trusts Income Tax

The trustees have the duty of disbursing Income Tax at the rates specified. Dividend-type income is taxed at 7.5%, and all other income is taxed at 20%. In certain cases, the trustees may opt to send the beneficiary the income directly rather than through the trustees. In this situation, the beneficiary must add this to their Self Assessment tax return and pay the applicable taxes for the trust income.

Bare Trusts

Whereas, if you are the recipient of a bare trust, you must pay tax on any income earned from it. This must be reported to HMRC through a Self Assessment tax return. However, if you do not usually submit a tax return, you must register for self-assessment by October 5 of the tax year in which the income was earned.

Settlor Interested Trusts

The settlor must pay any Income Tax on these trusts, even if the income is not taken out of the trust. The trustees will file a Trust and Estate Tax Return to pay the Income Tax on the trust income, providing the settlor with a statement of the income and the tax rates charged. The settlor must then inform HMRC of the Tax that the trustees have paid on their behalf in a Self Assessment tax return. The rate of Income Tax depends on the type of trust that the settlor has set up.

Are you feeling Confused? Don’t wait any longer. Book a free consultation and get your queries cleared with Taxtotal!

Share This :

Leave a Comment

Your email address will not be published. Required fields are marked *

Recent Post

Dont Hesitate To Contact Us

We would love to hear from you.