In recent weeks we’ve spoken at length about trusts and their various forms, such as parental trusts for children, and trusts for vulnerable people, as well as taking a deeper look at trustee responsibilities in general.
It’s now time to turn our attention to the issue of trusts and income tax; that is, what income tax is due on various different types of trust, and what allowances are there, if any, to offset these figures.
Accumulation or Discretionary Trusts
If you’re the trustee of an accumulation or discretionary trust it’s your responsibility to pay any income tax that is due. In accumulation or discretionary trusts the first £1,000 is taxed at 7.5% for dividend-type income, and 20% for other income. If the settlor (the person who places the assets into a trust) has two or more trusts, this £1,000 figure is divided between their trusts. If they have five or more trusts, each trust is allowed to have £200 taxed at the lower rate.
For trust income over the first £1,000 it is taxed at 38.1% for dividend-type income, and 45% for other income.
Unique among all other trusts in this list, bare trusts make it the responsibility of the beneficiary themselves to pay tax on the income accrued within them.
If you’re the beneficiary of a bare trust, this tax must be paid through your Self Assessment tax return.
In a somewhat simpler version of an accumulation or discretionary trust, if you’re the trustee of a possession trust you’re responsible to pay any income tax that is due, at a rate of 7.5% for dividend-type income, and 20% for other income.
If you choose/agree to mandate income to the beneficiary, with this income going directly to them rather than being passed through yourself (and other trustees, if applicable), it will be the beneficiary’s responsibility to pay tax on said income through their Self Assessment tax return.
As the name suggests, with settlor-interested trusts it’s the settlor, not the trustee or beneficiary, who is responsible for dealing with the income tax due on a settlor-interested trust.
Despite this being the settlor’s responsibility, once again it is the trustee themselves who actually pays the income tax due on the trust. The exact rate of income tax will depend on the type of trust the settlor-interested trust is.
Note on Dividends
It should be noted that trustees of any of the aforementioned trusts don’t qualify for the new dividend allowance. For this reason, all trustees must pay the full income tax rate on all dividend-type income received through a trust.
Experienced Trust and Income Tax Accountants
To speak with a professional accountant to discuss what income tax is due on your trusts, or for anything else, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.