Taxation of trusts (United Kingdom)

The taxation of trusts in the United Kingdom is governed by a different set of principles to those tax laws which apply to individuals or companies.

Inheritance tax

See main article Inheritance tax (United Kingdom).

The inheritance tax ("IHT") treatment of trusts was substantially revised by the Finance Act 2006, with effect from 22 March 2006. The possible types of trust which can now exist for inheritance tax purposes are set out in the table below:

Name Defining features Tax treatment
Bare trust Not a true trust: beneficiary is absolutely entitled to the income and capital. No tax on the trustees. Beneficiary taxed in all respects as if the assets are his or her own, personally.
Charity Trust for wholly charitable purposes. Inheritance tax free.
Pre-existing interest-in-possession trust The current interest-in-possession existed at 22 March 2006. Interest-in-possession treatment (see below).
Pre-existing accumulation and maintenance trust Trust was an accumulation and maintenance trust under the old rules (not explained on this page: broadly speaking, trusts for beneficiaries under 25) at 22 March 2006. Creation no longer possible. No ten-year charges or exit charges until 6 April 2008. May already fulfil the definition of an 18-25 Trust, or may (if its terms allow) be amended to so as to fulfil that definition before 6 April 2008. If so, taxed as an 18-25 Trust from that date. If not, taxed as a relevant property trust from that date.
Trust for bereaved minor Created in the will of the parent of the beneficiary concerned, who must be absolutely entitled on or before age 18. Tax as normal on creation (can only be created by will, therefore taxed as part of the settlor's death estate). No ten-year charges or exit charges.
18-25 trust Created either by amendment to an existing accumulation and maintenance trust, or in the will of the parent of the beneficiary concerned, who must be absolutely entitled on or before age 25. Tax as normal on creation (new ones can only be created by will, therefore taxed as part of the settlor's death estate). Trust becomes a relevant property trust (see below) upon the beneficiary attaining 18 (therefore a maximum exit charge of 7/10ths of 6% = 4.2% where the beneficiary becomes entitled at 25).
Immediate post-death interest An interest-in-possession trust, created by a will and taking effect immediately upon the death. Interest-in-possession treatment (see below). Spouse exemption available if the interest-in-possession beneficiary is a spouse or civil partner of the deceased.
Transitional serial interest Various situations where a pre-existing interest-in-possession trust has terminated in favour of a new interest-in-possession. Interest-in-possession treatment (see below). Spouse exemption available if the new interest-in-possession beneficiary is a spouse or civil partner of the previous interest-in-possession beneficiary.
Disabled trust Certain trusts for the benefit of a beneficiary with a disability. Interest-in-possession treatment (see below).
Relevant property trust Any trust not falling into another category, above. Prior to March 2006 this treatment applied mainly to discretionary trusts. Relevant property trust treatment (see below).

Notes:

  1. An "interest-in-possession" means that a specific beneficiary has a right to the current income of the trust.
  2. The spouse exemption exempts from tax any assets passing between spouses and civil partners.

Relevant property trusts are taxed:

The interest-in-possession treatment, since 2006, applies only to some trusts with an interest-in-possession (as defined above). Where it applies, such trusts are taxed by attributing the trust's value to the beneficiary who is currently entitled to the income. Accordingly:

Source: Schedule 20 Finance Act 2006.
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