How Are Trusts Taxed in the UK?

The short answer

Trusts in England and Wales can face three separate taxes: income tax on income the trust receives, capital gains tax (CGT) on gains when trust assets are sold, and inheritance tax (IHT) under what is known as the relevant property regime. How heavily a trust is taxed depends almost entirely on the type of trust. Bare trusts are largely transparent and taxed on the beneficiary; interest in possession trusts pay the basic rates of income tax; while discretionary and most other lifetime trusts pay the higher trust rates and are exposed to IHT entry, 10-yearly and exit charges.

This guide explains each tax in turn. The figures here are for England and Wales. Trust taxation is genuinely complex and the consequences of getting it wrong can be expensive, so treat this as an informed overview rather than a substitute for advice from a qualified estate planner or tax adviser. If you are still deciding whether a trust is right for you, our guide to what a trust is is a good starting point.

Income tax at trust rates

Where a trust receives income — rent, interest or dividends — someone has to pay income tax on it. Who pays, and at what rate, turns on the trust type.

• Bare trusts are treated as transparent. The beneficiary is absolutely entitled to the assets and income, so they are taxed as though the income were their own, using their personal allowance and tax bands. See our guide to bare trusts for more.
• Interest in possession trusts — where a beneficiary (the life tenant) has a right to the income — pay tax at the basic rates: 20% on most income and 8.75% on dividend income. The income is then treated as the life tenant's, who accounts for any higher-rate tax due, with credit for what the trustees have already paid.
• Discretionary trusts, where trustees decide who benefits, pay tax at the trust rates: 45% on most income and 39.35% on dividends. The standard rate band that used to tax the first slice of income at basic rates was withdrawn from 6 April 2024; in its place a de minimis rule means a trust with total income of £500 or less in a tax year has no income tax to pay, but once income exceeds £500 the whole amount is taxed at the trust rates.

When a discretionary trust distributes income to a beneficiary, it comes with a 45% tax credit. A beneficiary whose own marginal rate is lower can reclaim the difference from HMRC; a higher earner may have nothing further to pay. Discretionary trusts therefore work best where beneficiaries are non-taxpayers or basic-rate taxpayers who can recover tax.

Capital gains tax on trusts

Trustees pay CGT when they dispose of chargeable assets — selling investments or property, or transferring assets out to beneficiaries — and a gain arises. Trustees of most trusts have an annual CGT exempt amount equal to half the individual allowance, and this is shared between trusts created by the same settlor (subject to a minimum). Gains above the exemption are taxed at the trust rate for CGT.

CGT can also bite at the moment assets go into a trust. Transferring an asset that has risen in value into trust is a disposal for CGT, potentially crystallising a gain for the settlor. In some cases holdover relief lets the gain be deferred so the trustees inherit the asset's base cost instead — but the rules are narrow. This is one reason putting a property into trust is rarely as simple as it sounds; see can I put my house in trust for my children? for the wider picture.

Inheritance tax: the relevant property regime

This is the area that catches people out. Most discretionary trusts, and many lifetime trusts created on or after 22 March 2006, fall within the relevant property regime. Instead of IHT only being charged on death, these trusts face their own periodic IHT charges throughout their life. There are three to understand: the entry charge, the 10-yearly periodic charge, and exit charges. The reference point for all three is the IHT nil-rate band of £325,000, frozen until April 2030.

The entry charge

Putting assets into a relevant property trust during your lifetime is a chargeable lifetime transfer. If the value transferred (after exemptions) exceeds your available nil-rate band, the excess suffers an immediate 20% entry charge — rising to an effective 25% if you pay the tax yourself rather than the trustees. Your available nil-rate band is reduced by any chargeable transfers in the previous seven years, so earlier gifts matter. Transfers within the nil-rate band carry no entry charge, which is why many lifetime trusts are deliberately funded with no more than £325,000.

The 10-yearly periodic charge

On each 10-year anniversary of the trust, HMRC levies a periodic charge (sometimes called the principal charge) of up to 6% on the value of the trust assets above the available nil-rate band. The 6% is a maximum, not a flat rate: the actual rate is calculated by a formula, and where the trust's value sits at or below the nil-rate band, the charge can be nil. In practice the effective rate is usually well under 6%. Trustees must value the trust assets at each anniversary and report and pay any charge — a key part of their duties and responsibilities.

Exit charges

When capital leaves the trust — for example when assets are distributed to a beneficiary — an exit charge (or proportionate charge) may apply. It is based on the rate worked out at the last 10-year anniversary (or, for property leaving in the first 10 years, on the rate that applied when the trust was set up), scaled down according to how many complete quarters have passed since that point. Like the periodic charge, the maximum is 6%, and the charge is often modest or nil where the trust value is within the nil-rate band.

Taken together, these charges mean a relevant property trust can never be a way of removing assets from IHT entirely — instead it spreads a capped, periodic charge across the life of the trust. For larger estates, that can still be far cheaper than a 40% charge on death, but the numbers need working through carefully. Our guide on how to reduce inheritance tax sets these trade-offs in context.

How other trusts are treated

Not every trust sits in the relevant property regime. Bare trusts are outside it: the beneficiary is treated as owning the assets for IHT, so they form part of their estate. Certain trusts for disabled beneficiaries also receive special, more favourable treatment. Immediate post-death interest trusts — typically life interest trusts created by a will — are taxed as part of the life tenant's estate rather than under the relevant property charges. And life policies written in trust can keep the payout outside your estate altogether, paid to beneficiaries without waiting for probate; see putting life insurance in trust.

Because the IHT treatment flips so dramatically between trust types, choosing the right structure is at least as important as the assets you put in. Family trusts covers the common options used to protect a partner or children.

Getting this right

Three points are worth remembering. First, trustees must usually register the trust on HMRC's Trust Registration Service, even with little or no tax to pay, and file returns where tax is due. Second, the trust rates of income tax (45% and 39.35%) and the IHT charges look daunting in isolation, but for many families they are a modest price for control and protection. Third, the calculations — particularly the periodic and exit charges — involve formulae that reward careful planning, such as keeping a trust's value near the nil-rate band or timing distributions sensibly.

Trust taxation is one of the most technical corners of estate planning, and small differences in how a trust is drafted can change the tax dramatically. Before creating a trust, transferring assets into one, or acting as a trustee facing a charge, speak to a qualified estate planner or tax adviser who can model the figures for your specific situation. If you are weighing a trust against a simpler arrangement, trust vs will: which do you need? is a useful next read.