Trust Tax 2026/27: Main Trust Types

Trusts hold assets for people who cannot or should not own them directly, and their tax treatment depends on the type of trust, the assets and the event. A bare trust is generally transparent for Income Tax and the beneficiary is responsible for the income. An interest in possession trust can tax trustees or the life tenant depending on how income is paid. An accumulation or discretionary trust generally taxes retained income at 45% on most income and 39.35% on dividends, and relevant-property trusts can face 10-yearly inheritance tax charges that may be up to 6% after the detailed calculation. Model the inheritance side with the IHT Calculator→.

This guide explains the three main trust types, the rates that apply, the settlor rules, and the IHT charges that make discretionary trusts expensive to run.

The Three Main Trust Types

In a bare trust the beneficiary is generally absolutely entitled to the income and capital, and the trust is normally transparent for tax: income and gains are considered under the beneficiary’s rules, while the assets can form part of their estate. In an interest in possession (IIP) trust — a life interest trust — the life tenant is entitled to the income, but the tax reporting can depend on whether the trustees retain or mandate it; the trustees handle gains under the trust rules. In a discretionary trust nobody has an automatic right to anything; the trustees decide distributions and pay the applicable trust rates on income they retain.

Trustee Tax Rates 2026/27

Trustees of discretionary and IIP trusts generally pay capital gains tax at 24% in 2026/27, subject to reliefs, with an annual exempt amount of £1,500 for most trusts. The ordinary tax-free amount for an accumulation or discretionary trust is normally £500, subject to division between trusts and exceptions; if income exceeds that amount, the detailed trust-rate rules apply. The rate applicable to trusts is 45% for most other income and the dividend trust rate is 39.35% for dividends. When trustees distribute accumulated income, beneficiaries may receive a tax credit for trustee tax paid; the amount they can reclaim or owe depends on the distribution and their own tax position.

Settlor Rules

Two anti-avoidance areas need checking. First, where a parent provides property for a minor unmarried child and the resulting income exceeds £100 a year, the parental-settlement rule can attribute the income to the parent; the facts and exceptions matter. Second, settlor-interested rules can attribute trust income to the settlor where the settlor or spouse can benefit, but the treatment of income, gains and trust type is not identical in every case. The practical message is that who creates the trust and who can benefit affects the tax result; obtain professional advice before drafting or varying a settlement.

Inheritance Tax on Trusts

The 10-yearly charge is a defining cost of many relevant-property trusts. The maximum percentage is not a flat calculation: the result depends on the trust property, the available nil-rate band, previous chargeable transfers and the trust history. A £500,000 trust with an assumed £325,000 available nil-rate band and no other complications would have an illustrative £175,000 excess, but the actual liability must be calculated under the IHT rules. Exit charges depend on the relevant property and time since the last charge. Bare trusts and older IIP arrangements can have different IHT treatment, so do not apply the discretionary-trust example to every trust.

Worked Example — Discretionary Trust

Evelyn settled a discretionary trust with £500,000 a decade ago, and it is now worth £650,000 at its 10-year anniversary. If £325,000 were available as an assumed nil-rate band and no earlier-transfer or valuation complications applied, the illustrative excess would be £325,000 and a simple 6% illustration would be £19,500; the actual IHT calculation may differ. In an ordinary year the trust earns £12,000 of bond interest and £5,000 of dividends. Ignoring the trust’s tax-free amount and allowable deductions for illustration, trustees’ tax at the headline rates would be £5,400 and £1,967.50 respectively. Distribution tax credits and beneficiary claims then depend on the trust accounts and the beneficiary’s tax position.

Trustee Administration and Filing

Trustees carry heavy administrative duties: check whether the trust must be registered with the Trust Registration Service and follow the applicable deadline, file SA900 when HMRC requires it, complete IHT100 for reportable inheritance-tax events, and issue R185 certificates where income is distributed and a certificate is needed. For a 10-year anniversary, IHT is generally payable no later than six months after the anniversary; HMRC’s reporting guidance and the particular IHT100 event form should be checked. Keep the trust deed, bank statements, investment history and distribution decisions for the relevant record-retention period. Failure to register can attract a penalty of up to £5,000 in the circumstances set out by HMRC. Trustees also owe fiduciary duties, and the legal responsibility rests with the trustees personally, not the adviser.

Interest in Possession Example

An IIP trust shows how differently income flows are taxed. Susan's will creates a life interest trust of £500,000 for her husband David, with the capital passing to her children when David dies. The trust earns £15,000 of bond interest a year, paid to David. Because the life tenant owns the income, David's personal allowance (£12,570) and the £5,000 starting rate for savings shelter most of it, so his tax on the £15,000 is minimal if he has no other income — compared with a discretionary trust where the trustees would pay 45% on everything above £1,000. The trade-off appears at death: the £500,000 fund is treated as part of David's estate for IHT, potentially adding to a 40% charge, whereas a discretionary trust would face the periodic charge instead. The choice of trust type is therefore a bet on who lives longest and which tax is cheaper — income tax now or IHT later.

Frequently Asked Questions

Evidence and decision checks

A reliable trust tax 2026 27 review starts by fixing the tax year and the date on which the relevant event happened. Record the person's or business's status, the income or transaction category, the amount before tax, tax already withheld, and any election or claim being relied on. Do not combine a headline figure with a final liability: the result can change when another income source, a payment date, an ownership interest or a qualifying condition is added.

Keep the source documents behind every important input. Depending on the subject, that may include payslips, invoices, bank statements, contracts, provider statements, travel records, HMRC notices, payroll submissions, valuations or correspondence. Where an amount is apportioned, write down the method and retain the underlying total. If a correction is made, preserve the original figure and explain the reason, date and evidence for the replacement.

Before relying on the result, check the current official guidance for the same tax year and jurisdiction. Distinguish enacted law from a consultation, draft measure, announcement or future proposal, and record the effective date. Reconcile the final estimate to the relevant return, payroll record or HMRC account. A calculator or explanatory guide can support a decision, but it cannot replace the eligibility test or the official filing and payment process.

Evidence and decision checks

A reliable trust tax 2026 27 review starts by fixing the tax year and the date on which the relevant event happened. Record the person's or business's status, the income or transaction category, the amount before tax, tax already withheld, and any election or claim being relied on. Do not combine a headline figure with a final liability: the result can change when another income source, a payment date, an ownership interest or a qualifying condition is added.

Keep the source documents behind every important input. Depending on the subject, that may include payslips, invoices, bank statements, contracts, provider statements, travel records, HMRC notices, payroll submissions, valuations or correspondence. Where an amount is apportioned, write down the method and retain the underlying total. If a correction is made, preserve the original figure and explain the reason, date and evidence for the replacement.

Before relying on the result, check the current official guidance for the same tax year and jurisdiction. Distinguish enacted law from a consultation, draft measure, announcement or future proposal, and record the effective date. Reconcile the final estimate to the relevant return, payroll record or HMRC account. A calculator or explanatory guide can support a decision, but it cannot replace the eligibility test or the official filing and payment process.

Check the inheritance consequences with the IHT Calculator→ and read the Inheritance Tax guide or the Deeds of Variation guide before restructuring any family settlement.

Official sources

• GOV.UK — Trusts and Income Tax
• GOV.UK — Trusts and Capital Gains Tax
• GOV.UK — Capital Gains Tax rates and allowances
• GOV.UK — Registering a trust
• GOV.UK — Check if you need to register a trust
• GOV.UK — Paying Inheritance Tax on trusts
• GOV.UK — Trusts and Inheritance Tax
• HMRC — Trusts, Settlements and Estates Manual updates