How is a settlor-interested trust taxed in the UK?

Full answer

A trust is 'settlor-interested' if the person who put assets in (the settlor), their spouse or civil partner, can benefit from it, or if a minor unmarried child of the settlor benefits. The aim of the settlor-interested rules is to stop people sheltering income at lower trust rates by parking assets in a trust they can still tap. The effect is that trust income is treated as the settlor's income for the year it arises, whether or not it is paid out. The settlor reports it on their Self Assessment return and pays Income Tax at their personal marginal rate -- 20% basic, 40% higher or 45% additional -- and dividend income at the dividend rates of 10.75%, 35.75% or 39.35% for 2026/27. Mechanically, the trustees often still account for tax first, and the settlor gets credit for tax the trust has paid; if the settlor's rate is lower, they can reclaim the difference, and if higher, they pay the top-up. Where the settlor actually receives income that has been taxed in the trust, they may be entitled to recover that tax from the trustees so the right person bears the cost. Worked illustration: a higher-rate settlor sets up a discretionary trust that earns GBP 10,000 of rental income but distributes nothing. Despite no distribution, the GBP 10,000 is added to the settlor's income and taxed at 40%, giving a GBP 4,000 liability for the settlor. Capital gains made by the trustees can also be attributed to a UK-resident settlor of a settlor-interested trust in some cases. The rules are intricate and interact with the trust's own tax position, so confirm the precise treatment with HMRC guidance or an adviser. Use the income tax calculator to see how attributed trust income stacks on top of your other earnings and which band it falls into.

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