Trust Income Tax Calculator

Complete Guide to UK Trust Income Tax 2026/27

What Is a Trust?

A trust is a legal arrangement where one person (the settlor) transfers assets to trustees, who hold and manage them for the benefit of one or more beneficiaries. Trusts are widely used in the UK for estate planning, asset protection, tax planning, and providing for vulnerable beneficiaries. Each type of trust has distinct income tax, capital gains tax, and inheritance tax consequences that must be managed carefully by professional trustees.

Types of UK Trust and Their Tax Treatment

Bare Trusts (Absolute Trusts)

In a bare trust the beneficiary has an immediate and absolute right to both the capital and income. For income tax purposes HMRC treats the beneficiary as directly owning the assets — the trust is transparent. The beneficiary's own personal allowance and tax rates apply. However, if the beneficiary is a minor child of the settlor, the parental settlement rules treat income over £100 per year as the settlor's own income (to prevent tax avoidance). Bare trusts are simple to administer and attract no periodic IHT charges.

Interest in Possession Trusts

An IIP trust gives the life tenant (the income beneficiary) a right to all trust income as it arises. Trustees pay tax at the basic rate (20% on non-savings, 8.75% on dividends) and the life tenant receives a tax credit. The life tenant declares the grossed-up income on their own Self Assessment return and pays any additional tax if they are a higher-rate or additional-rate taxpayer, or receives a refund if they are a basic-rate taxpayer.

Discretionary Trusts

Discretionary trusts give trustees the power to decide who receives income and capital, in what amounts, and when. Because no single beneficiary has a fixed entitlement, income is taxed at the much higher trust rates: 45% on non-savings income and 39.35% on dividends — but only on income above the £1,000 standard rate band. Within the standard rate band, the basic rates (20% / 8.75%) apply. When trustees distribute income to beneficiaries, a tax credit at 45% is available for the beneficiary to reclaim if their own rate is lower.

The Standard Rate Band

The standard rate band (SRB) of £1,000 per year is a protected amount within which trustees pay income tax at the basic rates (not the higher trust rates). It is shared among all trusts created by the same settlor — so if a settlor has created five trusts, each gets £200 of SRB. If there are more than five trusts from the same settlor, the minimum SRB per trust is £200. The SRB cannot be carried forward or back between tax years.

Trust Register (TRS) Requirements

Following the Fifth Anti-Money Laundering Directive, HMRC's Trust Registration Service (TRS) now requires almost all express trusts to register — not just those with a UK tax liability. Deadlines: trusts created before 6 April 2021 must have registered by 1 September 2022; new trusts must register within 90 days of creation. Trustees must report beneficial owners (settlors, trustees, beneficiaries with 25%+ interest and any potential beneficiaries). Non-compliance can trigger civil penalties.

Inheritance Tax: 10-Year Anniversary and Exit Charges

Most discretionary trusts (and post-2006 IIP trusts) are "relevant property trusts" subject to IHT periodic and exit charges:

• Periodic charge: Up to 6% of trust assets above the available nil-rate band (£325,000 in 2026/27), charged every 10 years. The actual rate is calculated using a formula based on the trust's value, the settlor's cumulative gifts in the prior 7 years, and any previous periodic charges.
• Exit charge: Applies when assets leave the trust (distributed to beneficiaries or appointed out). Calculated proportionally based on the time elapsed since the last 10-year anniversary charge.
• Nil-rate band sharing: A settlor's nil-rate band is shared across all their relevant property trusts.

Careful planning — including use of multiple trusts, timing of distributions, and use of the nil-rate band — can minimise these charges. Professional trust accountants are essential for ongoing IHT compliance.

Settlor-Interested Trusts

If the settlor or their spouse/civil partner can benefit from the trust (directly or indirectly), it is "settlor-interested." For income tax, all trust income is treated as the settlor's own income, regardless of what the trustees actually do with it. This prevents parents from sheltering income in trusts for their own benefit. Settlor-interested trusts do not benefit from the lower trust rates — the settlor's personal rates apply to all income. Trustees retain the right to recover tax from the settlor.

Distributing Income to Beneficiaries

When a discretionary trust distributes income to a beneficiary, the payment carries a tax credit at 45% (the trust rate). The beneficiary reports the grossed-up amount on their Self Assessment return and pays their own marginal rate on it — claiming back the excess credit if their rate is lower than 45%. For example, a basic-rate beneficiary receiving a £5,500 distribution (grossed up: £10,000) pays 20% income tax (£2,000) and reclaims the excess trust tax of £2,500 — receiving an effective repayment of £2,500 from HMRC. Trustees must provide beneficiaries with form R185 (Trust Income) each year.

Capital Gains Tax in Trusts

Trusts have a CGT annual exempt amount of £1,500 (2026/27) — half the individual's £3,000 allowance, shared among trusts from the same settlor (minimum £300). CGT rates for trusts are 24% on residential property gains and 24% on other assets (same as the higher rate for individuals from October 2024). Trustees can hold-over gains when assets are transferred into or out of a trust in certain circumstances, deferring the tax until the recipient disposes of the asset.

Worked Examples: Trust Income Tax 2026/27