UK Trust Taxation Overview 2026 -- Income Tax, CGT and IHT

Trusts are one of the oldest and most versatile legal structures in English law. They are used for estate planning, asset protection, charitable giving, and providing for vulnerable beneficiaries. Their tax treatment, however, is complex. Different types of trust are subject to radically different income tax, CGT, and IHT rules. This guide provides a comprehensive overview of UK trust taxation in 2026/27.

Types of UK Trust

Before discussing tax, it is important to understand the main types of trust in the UK.

Bare Trusts (Absolute Trusts)

In a bare trust, the trustee holds assets for the benefit of a specific beneficiary who is absolutely entitled to the assets. The beneficiary can demand the assets at any time (or at age 18 for minors). Bare trusts have the simplest tax treatment: the beneficiary is treated as the legal owner for all tax purposes.

Interest in Possession Trusts (IIP Trusts)

In an IIP trust, one beneficiary (the "life tenant") has the right to receive income from the trust for their lifetime or a specified period. On the death of the life tenant (or the end of the income interest), the trust capital passes to the "remainder beneficiaries." The trust deed may give the trustees discretion over capital distributions but the life tenant has an absolute right to income.

Discretionary Trusts

In a discretionary trust, the trustees have discretion to decide which beneficiaries receive income and/or capital, when they receive it, and how much they receive. No beneficiary has a fixed entitlement. Discretionary trusts are subject to the most complex tax rules.

Accumulation Trusts

An accumulation trust allows trustees to accumulate income within the trust rather than distributing it. They are taxed similarly to discretionary trusts.

Income Tax: Bare Trusts

Bare trust income is taxed as the beneficiary's own income. The bare trust is essentially transparent for tax purposes.

If the beneficiary is a minor child and the settlor is a parent, the settlements legislation applies: income from parental gifts to minor children that exceeds GBP 100 per year is taxed as the parent's income, not the child's.

Example: Grandparents set up a bare trust for their grandchild with GBP 20,000 invested in an interest-paying account yielding GBP 600 per year. The grandchild has the GBP 600 of interest as their income. With a personal allowance of GBP 12,570, the grandchild pays no income tax (assuming this is their only income).

Income Tax: Interest in Possession Trusts

For IIP trusts, income is assessed on the trustees at the basic rate (20% for non-savings income, 20% for savings income). The life tenant is then entitled to the net income and can reclaim tax paid at source if their personal tax position allows, or must pay additional tax at higher rates.

In practice:

• Trustees file a trust tax return (SA900) showing income received and tax deducted.
• The life tenant declares the income on their personal Self Assessment return, taking credit for the 20% paid by the trustees.
• A higher-rate taxpayer life tenant pays the additional 20% (40% - 20%) personally.

Dividend income in an IIP trust is taxed at the trust dividend rate (8.75% for the first GBP 1,000 within the standard rate band, then 39.35% above that if accumulating). The life tenant receives the grossed-up income with a credit for trust tax paid.

Income Tax: Discretionary Trusts

Discretionary trusts are subject to the highest income tax rates to prevent income being sheltered within the trust indefinitely.

Standard rate band: The first GBP 1,000 of income in a discretionary trust is taxed at the basic rate (20% for non-savings/savings income, 8.75% for dividends).

Above GBP 1,000:

• Non-savings income: taxed at 45% (the trust rate).
• Savings income: taxed at 45%.
• Dividend income: taxed at 39.35% (the trust dividend rate).

These rates are significantly higher than individual rates. The purpose is to make income accumulation within discretionary trusts expensive and to encourage income distribution to beneficiaries.

When trustees distribute income to beneficiaries, a tax pool credit system operates: the beneficiary receives a tax credit representing the 45% tax paid by the trustees. If the beneficiary is a basic-rate taxpayer, they can reclaim the excess (45% - 20% = 25% refund per GBP 1 received net). If they are a higher-rate taxpayer, they pay a smaller top-up.

The standard rate band of GBP 1,000 is shared equally between all trusts created by the same settlor (subject to a minimum of GBP 200 per trust if there are five or more trusts).

Example: A discretionary trust receives GBP 8,000 of savings interest in 2026/27.

First GBP 1,000 taxed at 20%: GBP 200. Remaining GBP 7,000 taxed at 45%: GBP 3,150. Total income tax on the trust: GBP 3,350.

If the trustees distribute GBP 5,000 (net of tax) to a beneficiary who is a basic-rate taxpayer:

The beneficiary receives a tax credit of 45/55 x GBP 5,000 = GBP 4,090.91 (gross equivalent: GBP 9,090.91).

The beneficiary's income tax at 20%: GBP 1,818.18. Credit available: GBP 4,090.91. Refund: GBP 2,272.73.

This tax pool system ensures income is effectively taxed at the beneficiary's marginal rate, not at the punitive 45% trust rate permanently.

CGT: Trusts

Trustees are subject to CGT in the same way as individuals, but with differences in rates and the annual exempt amount.

CGT Rates for Trustees

From 30 October 2024, CGT rates for trustees on non-residential assets are:

• 18% for gains in the basic rate band (but trusts do not have a basic/higher rate distinction in the same way -- see below)
• 24% for other gains

In practice, trustees pay CGT at a flat rate of 24% on most gains (the trust rate equivalent to higher-rate individuals). For residential property (where the higher 24% rate has applied since 2024/25), the rate is 24%.

Trustees benefit from BADR (Business Asset Disposal Relief) for qualifying business assets at 18% (2026/27 rate).

Annual Exempt Amount for Trusts

The CGT annual exempt amount (AEA) for trusts in 2026/27 is GBP 1,500 -- half the individual amount of GBP 3,000.

This GBP 1,500 must be shared equally between all trusts created by the same settlor. If a settlor has created two trusts, each trust has only GBP 750 of AEA. The minimum AEA per trust is GBP 300 (if there are five or more trusts from the same settlor).

Hold-Over Relief

Trustees can claim hold-over relief when disposing of qualifying business assets or when making gifts of chargeable assets. Hold-over relief defers the gain by reducing the recipient's base cost.

Hold-over relief is available for:

• Business assets (TCGA 1992 s.165).
• Transfers that are immediately chargeable lifetime transfers (e.g., transfers to or from a discretionary trust).

Hold-over relief is commonly used when assets are appointed out of a discretionary trust to a beneficiary, deferring any CGT until the beneficiary sells.

IHT: Bare Trusts

Bare trusts are transparent for IHT purposes. The assets are treated as belonging to the beneficiary:

• If the settlor transfers assets into a bare trust, this is a potentially exempt transfer (PET) -- IHT exempt if the settlor survives seven years.
• The trust assets are included in the beneficiary's estate on their death.
• No IHT periodic or exit charges apply to bare trusts.

IHT: Interest in Possession Trusts

The IHT treatment of IIP trusts depends on when the interest in possession was created.

Pre-22 March 2006 IIP trusts: The life tenant is treated as owning the trust assets. The assets are included in the life tenant's estate on death. No relevant property regime charges apply.

Post-22 March 2006 IIP trusts: Most new IIP trusts are now subject to the relevant property regime (same as discretionary trusts), except for qualifying trusts (such as immediate post-death interests and disabled person's trusts). This was a significant change -- most IIP trusts created after March 2006 are now relevant property trusts.

Immediate post-death interests (IPDIs): An IIP arising from a will (where the deceased gives a spouse a life interest and the children take the capital on the spouse's death) is treated as if the spouse owns the trust assets. This falls outside the relevant property regime and qualifies for the spouse exemption on the first death.

IHT: Discretionary Trusts -- The Relevant Property Regime

Discretionary trusts (and most post-March 2006 IIP trusts) are subject to the "relevant property regime" for IHT. This involves three types of charge:

Entry Charge (On Creation)

When you transfer assets into a discretionary trust, you are making a chargeable lifetime transfer (CLT). If your available nil rate band (NRB) has not been used up (GBP 325,000 in 2026/27), no entry charge applies. Excess over the NRB is charged at 20% (half the death rate of 40%).

Example: You have made no previous CLTs and transfer GBP 500,000 into a discretionary trust. NRB: GBP 325,000. Excess: GBP 175,000. Entry charge: GBP 175,000 x 20% = GBP 35,000.

The CLT is also brought back into account if you die within seven years (potentially increasing the charge to 40%).

Periodic Charge (10-Year Anniversary)

Every 10 years, the trust is subject to a periodic charge based on the value of the trust's "relevant property" at the anniversary date.

The maximum periodic charge is 6% of the trust's relevant property value. The actual rate is calculated using a formula that takes into account the settlor's available NRB.

Simplified calculation:

Chargeable value at anniversary x Effective rate = Periodic charge.

The effective rate is typically a fraction of 6%, depending on how much NRB is available and how long the trust has existed.

Exit Charge (Capital Distributions)

When capital leaves the trust (appointed to a beneficiary), an exit charge applies. The exit charge is a fraction of the most recent periodic charge rate, pro-rated for the number of complete quarters since the last 10-year anniversary.

Example: A trust has a 10-year anniversary charge rate of 3%. Six months after the anniversary, the trustees appoint GBP 100,000 to a beneficiary. Exit charge: 3% x 2/40 (2 complete quarters out of 40 in the 10-year period) x GBP 100,000 = GBP 150.

Exit charges are generally small between anniversaries but must be calculated and reported to HMRC.

The Settlor-Interested Trust Anti-Avoidance Rules

If the settlor (the person who creates the trust) retains an interest in the trust -- meaning they or their spouse can benefit from the trust assets or income -- the settlements legislation applies:

• Trust income is taxed as the settlor's own income (not the trustees' or beneficiaries').
• Trust capital gains may be attributed to the settlor.
• The settlor cannot use the trust to reduce their income tax or CGT liability.

An "interest" includes: the settlor being a discretionary beneficiary; the settlor's spouse being a beneficiary; the settlor being able to benefit indirectly.

This anti-avoidance rule prevents the most obvious tax planning -- putting assets in trust for your own future benefit while claiming you no longer own them.

Trust Registration Service (TRS)

Since 2022, most UK trusts must register with HMRC's Trust Registration Service. This includes:

• All UK express trusts (trusts deliberately created in writing or verbally).
• Non-UK trusts that acquire UK assets or have UK beneficiaries.

Exceptions: Bare trusts for children's accounts (where the child is the only beneficiary) and certain other simple trusts.

Trustees must update the TRS annually and report changes in trustees, beneficiaries, or trust assets.

Conclusion

UK trust taxation involves three separate tax regimes (income tax, CGT, IHT) and the rules vary significantly between trust types. Discretionary trusts face the highest tax burden -- 45% income tax, 24% CGT (with a reduced AEA), and the relevant property regime's periodic and exit IHT charges. Interest in possession trusts (particularly pre-2006 ones) can be more IHT-efficient but have been largely absorbed into the relevant property regime for new trusts. Bare trusts are tax-transparent. Professional advice from a trust specialist accountant and a solicitor is essential before creating a trust or making significant decisions about an existing one.