Glossary · UK
What is Settlor-Interested Trust?
A trust in which the settlor, their spouse or civil partner can benefit, causing the trust's income (and often gains) to be taxed on the settlor.
Full Definition
A settlor-interested trust is one where the person who created the trust (the settlor), or their spouse or civil partner, can benefit from it, either through income, capital or as a potential beneficiary. In some cases minor children of the settlor also trigger the rules. UK anti-avoidance legislation prevents people from sheltering income by giving assets to a trust they can still benefit from. As a result, trust income is taxed as the settlor's own income at their personal rates, even if they have not actually received it, and capital gains may also be attributed to the settlor. The settlor includes the income on their Self Assessment return and the trustees provide the figures. This matters because the intended tax advantages of using a trust can be lost, and the settlor faces a personal liability on income they may never see. Careful drafting is needed to avoid an unintended settlor-interest, particularly with discretionary trusts.