UK Trust Taxation Deep-Dive: 2026/27

UK Trust Taxation Deep-Dive 2026/27

Q: What is a UK trust + why are they used?

Trust : legal arrangement where one person (settlor) transfers property to another (trustees) to hold for benefit of third party (beneficiaries). Statutory basis: Trustee Act 1925 + 2000, common law equity. Common UK trust uses : (1) Family estate planning : pass wealth across generations while controlling timing/conditions. (2) Vulnerable beneficiary protection : minors, disabled, spendthrift - trust manages assets responsibly. (3) Tax planning : lifetime transfers reduce settlor's estate + potentially reduce IHT (subject to 7-year rule). (4) Asset protection : trustee-held assets shielded from beneficiaries' creditors / divorce / bankruptcy. (5) Charitable purposes : charitable trusts tax-exempt. (6) Pension scheme : occupational pensions structured as trusts. (7) Will trusts : testamentary trusts in Wills - common for second marriages with children from prior relationship. (8) Business succession : family business shares held in trust for next generation. (9) Bare trust for children : JISA-like structures for child savings. Key elements : SETTLOR creates trust + transfers property; TRUSTEES hold legal title + administer; BENEFICIARIES have beneficial / equitable interest; TRUST DEED governs powers + duties. Three certainties required (Knight v Knight 1840): certainty of intention, certainty of subject matter, certainty of objects. Modern UK trust environment : increasingly complex post-2006 tax reforms. Family Investment Companies often preferred for some objectives. Trusts remain essential for vulnerable beneficiaries + cross-generational planning + Wills.

Q: What are the main UK trust types?

Six main trust types : (1) Bare trust : beneficiary has absolute equitable ownership. Trustees hold legal title only. Income/gains taxed on beneficiary's tax return at their marginal rate. Common for minor children's accounts. (2) Interest-in-Possession (IIP) trust : life tenant has right to income; remaindermen receive capital on life tenant's death. Pre-March 2006 IIPs taxed favourably (in life tenant's estate for IHT). Post-2006 IIPs taxed under Relevant Property regime. (3) Discretionary trust : trustees have discretion over income/capital distribution among class of beneficiaries. Most flexible + most tax-complex. (4) Accumulation + Maintenance (A&M) trust : pre-2006 trust for minor children. New A&M trusts largely abolished by Finance Act 2006; existing transitioned to discretionary by April 2008. (5) Disabled Person's trust : for beneficiary with qualifying disability. Tax-favoured - bare trust treatment for IHT (no Relevant Property regime). Section 89 IHTA 1984. (6) Charitable trust : established for charitable purposes. Tax-exempt for IT + CGT + IHT. Charities Act 2011. Other categories : Pilot trusts : small initial trusts expanded later. Asset Protection Trusts : offshore variants - significant UK anti-avoidance rules apply. Mixed trusts : hybrid types combining elements. Section 73 trusts : very specific narrow category for parental settlements. Choosing trust type : depends on objectives (control, tax efficiency, beneficiary protection, simplicity). Specialist legal + tax advice essential.

Q: How is income taxed in UK discretionary trusts?

Discretionary trust income : complex tax structure favouring distribution over accumulation. Standard rate band £500 : first £500 of trust income taxed at "standard rates" (20% for non-dividends, 8.75% for dividends). Section 491 ITA 2007. From April 2024 reduced from £1,000 (was £1,000 since 2009). Trust rate above £500 standard band : 45% on non-dividend income (matching additional-rate). 39.35% on dividends. Worked example - £20k trust income : £500 at 20% / 8.75% (standard band) = ~£75-100. £19,500 at 45% (non-dividend) = £8,775. Total IT ~£8,850 (44% effective). Significantly above individual marginal rates. Distribution mechanism : trustees can distribute income to beneficiaries. Beneficiary receives "net" distribution + Section 481 ITTOIA 2005 tax credit. Beneficiary pays IT at their marginal rate but gets credit for trust IT already paid. Tax credit reclaim : low-rate beneficiaries can reclaim part of trust IT (if beneficiary marginal rate < trust 45%). Basic-rate beneficiary receives £55 net from trust + £45 credit = £100 gross income. At basic-rate 20% = £20 IT. Refund £45 - £20 = £25 from HMRC. Practical implication : discretionary trusts highly tax-inefficient for accumulating income. Distribution to lower-rate beneficiaries dramatically reduces effective rate. Most trusts distribute all income annually as a result.

Q: How is CGT calculated for trustees?

Trust CGT : trustees pay CGT on disposals from trust assets. Statutory basis: Section 65 TCGA 1992 (trust gains) + Section 87 TCGA 1992 (non-resident trust gains). Trust CGT rates 2026/27 : 24% on most assets (post-October 2024 reform aligned all rates). 28% on residential property (separate higher rate). Trust AEA : £1,500 annual exempt amount for most trusts. Lower than individual £3,000 AEA . Settlor's other trusts can reduce this further - if settlor has multiple trusts, AEA divided across them with £600 minimum. Disabled Person's trust + Vulnerable beneficiary trust : full £3,000 AEA available (same as individual). Worked example - trust sells shares for £15,000 gain : £15,000 - £1,500 AEA = £13,500 taxable. At 24% = £3,240 CGT. Compare to individual : same £15k gain - £3,000 AEA = £12,000 × 24% = £2,880. Trust pays £360 more on same gain due to lower AEA. Distribution of capital : distributing capital to beneficiary is typically NOT a CGT disposal (no consideration received by trust). But beneficiary takes on trust's base cost - subsequent disposal by beneficiary triggers their CGT calculation. Hold-over election (Section 165 TCGA 1992) : gifts to/from trusts can elect to hold over gain. Trust takes on settlor's base cost (gift in). Beneficiary takes on trust's base cost (gift out). Avoids immediate CGT but defers to next disposal. Section 86 TCGA non-resident trust : complex anti-avoidance attributing offshore trust gains to UK-resident settlor.

Q: What is the 10-yearly IHT periodic charge on discretionary trusts?

Relevant Property Regime : discretionary trusts (+ post-2006 IIPs) face IHT charges on entry, every 10 years, and on exit. Statutory basis: Sections 64-69 IHTA 1984. Entry charge : 20% IHT on settlement value above settlor's available NRB (£325k). E.g. £500k into trust = (£500k - £325k) × 20% = £35,000 IHT on entry. 10-yearly periodic charge : 6% of value above NRB every 10 years from trust creation. Statutory basis: Section 64 IHTA 1984. Worked example - £1m trust at 10-year anniversary : £1,000,000 - £325,000 NRB = £675,000. £675k × 6% = £40,500 IHT charge every 10 years. Exit charges : when capital leaves trust to beneficiary BETWEEN 10-year anniversaries, exit charge applies. Calculated as fraction of next periodic charge. Section 65 IHTA 1984. Worked example exit charge : £100k distributed 3 years into 10-year cycle. £100k × 6% × (30 quarters of 40 used) = £4,500 exit charge approximately. NRB sharing across multiple trusts : anti-avoidance from 2015 (Section 80B IHTA 1984) - multiple settlements by same settlor share single NRB chronologically. Reduction strategies : (a) keep settlement below NRB - no entry, periodic, or exit charges; (b) split assets across multiple settlors (separately funded); (c) use Business Property Relief / Agricultural Property Relief eligible assets (100% relief up to £1m cap from April 2026); (d) use disabled person's trust (bare trust treatment). Compare to other transfer routes : outright gifts use 7-year PET rule (potentially zero IHT if survive 7 years). Trusts have certainty of charges + control benefit.

Q: How are bare trusts taxed?

Bare trust = simplest form . Beneficiary has absolute equitable interest from outset. Trustees hold legal title for administrative convenience only. Common use cases : (1) Minor children's accounts : parent / grandparent transfers money to bare trust until child reaches 18. Common name on bank account: "John Smith as Trustee for Alice Smith". (2) Custodian accounts : investment platforms hold assets as bare trustee for adult investor. (3) Lump sum settlements : vulnerable adult given lump sum via bare trust to manage practical aspects. Income Tax : income taxed AS IF beneficiary owns directly. Beneficiary declares all income on own SA / tax return. Beneficiary's PA / band / allowances apply. Critical for parent settlor + minor child : Section 629 ITTOIA 2005 anti-avoidance rule. If parent settles >£100 of income on minor child, all income TAXED ON PARENT. Cap at £100 means anything above the limit unhelpful for parental tax planning. Grandparent settlements + non-parental gifts NOT caught by Section 629. CGT : gains taxed on beneficiary. Beneficiary's £3,000 AEA + 18% / 24% rates apply. IHT : bare trust assets ARE in beneficiary's estate from outset. Settlor's PET rule applies to original transfer (7-year rule). Trust register : bare trusts generally registrable on Trust Registration Service (TRS) if assets >£100 OR taxable. JISA + Child Trust Fund : technically bare trusts but with specific tax-advantaged regulations - £9,000 JISA annual allowance tax-free.

Q: What is the settlor anti-avoidance under Section 624 ITTOIA?

Settlor-interested trust rules : complex anti-avoidance preventing settlor from extracting tax benefits by settling income-producing assets into trust then receiving benefit themselves. Statutory basis: Sections 619-648 ITTOIA 2005 (Income Tax) + Section 86 TCGA 1992 (CGT). Section 624 ITTOIA : trust income arising from settlement where SETTLOR has retained interest is attributed back to settlor + taxed at settlor's marginal rate (regardless of who actually receives the income). "Retained interest" : defined broadly. Includes settlor / settlor's spouse / civil partner / unmarried partner / minor child receiving any benefit from trust. Worked example : husband settles £200k of dividend-paying shares into discretionary trust for wife + adult children. Wife is beneficiary. Husband-settlor STILL taxed on all trust income because wife (his spouse) is beneficiary. Trust income £10k = £4,000 IT for husband at 40%. Even if income retained in trust : settlor still personally liable for tax. Trustees can recover paid tax from settlor under Section 646 ITTOIA. Section 86 TCGA non-resident trust attribution : similar rules for CGT - non-UK trust gains attributed to UK-resident settlor if settlor / family retained interest. Escape : settlor must EXCLUDE themselves + spouse + minor children from ALL benefit. Trust deed must contain irrevocable exclusion clauses. Discretionary trusts can include "default beneficiary" arrangement excluding settlor. Strategic implication : settlor-interested trusts are tax-INEFFICIENT for current income (settlor pays tax). Used for asset protection / control / estate planning purposes despite tax cost. For tax efficiency, settlor must give up all economic interest - true estate-planning gifts.

Q: What is the Trust Registration Service (TRS)?

TRS : HMRC online register of UK trusts. Mandatory since 6 October 2020 (Section 75-79 Money Laundering Regulations 2017 + 5th Anti-Money Laundering Directive). Registration required for : (1) All UK express trusts (whether taxable or not) since 1 September 2022. Includes bare trusts. (2) Trusts with UK tax liability : any tax year with IT / CGT / IHT / SDLT liability. (3) Non-UK trusts with UK property / UK business assets . Exemptions : pension scheme trusts, charitable trusts, certain insurance trust arrangements, will trusts in 2-year administration period. Information required : settlor name + address + date of birth + NI / UTR + nationality + tax residence; trustees same details; beneficiaries (named or class description); trust deed key terms + assets held + value. Update obligation : changes to trust details must be reported within 90 days. Annual confirmation required for taxable trusts. Penalties : £100 for late registration. £500 if >3 months. Further penalties at HMRC discretion. Beneficiaries' access to TRS data : HMRC can share data with other government agencies + (in limited cases) private parties demonstrating legitimate interest. Privacy advocates have raised concerns. Compliance importance : TRS non-compliance increasingly enforced. Combined with tax compliance reviews (CRS, CARF, etc.) HMRC has comprehensive trust visibility. Practical advice : existing trusts not yet registered need urgent compliance. New trusts must register within 90 days of trustees becoming UK-resident or trust generating UK tax liability.

Q: How does the 7-year rule apply to trusts?

Lifetime gifts to trusts : NOT treated as Potentially Exempt Transfers (PETs). Different IHT treatment vs gifts to individuals. Discretionary trust gift = Chargeable Lifetime Transfer (CLT) : immediate 20% IHT on value above settlor's NRB at gift date (Section 7 IHTA 1984). If settlor dies within 7 years, full 40% IHT charge re-applied with credit for 20% already paid. IIP trust gift : Pre-March 2006 IIPs were PETs (zero IHT if 7-year survival). Post-2006 IIPs : treated as CLTs same as discretionary. Bare trust gift : STILL a PET (treated as direct gift to beneficiary). 7-year rule + taper relief applies. Disabled Person's trust gift : PET treatment if all conditions met (Section 89 IHTA 1984). Worked example discretionary trust : settle £500k into discretionary trust + settlor has full NRB. Excess £175k × 20% = £35k entry IHT. Settlor pays £35k IHT + transfers £500k of value into trust. Settlor dies within 7 years: full 40% rate applied. £175k × 40% = £70k - £35k already paid = £35k additional IHT. Taper relief reduces but only after NRB exhausted. 7+ year survival : original £35k IHT stands. No additional charge. Trust now properly outside settlor's estate but ENTERS Relevant Property regime - 10-yearly periodic + exit charges continue. Compare bare trust : same £500k gift to bare trust + 7+ year survival = £0 IHT. Plus trust assets in beneficiary's estate from outset. Often simpler + cheaper than discretionary for outright giving.

Q: Are there any tax benefits of trusts in 2026/27?

Significantly reduced tax benefits post-2006 reforms . Most pure tax-driven trust structures unwound or non-cost-effective. Remaining genuine tax benefits : (1) Vulnerable beneficiary protection : Disabled Person's trust + Section 89 IHTA 1984 trust offer favourable treatment (full CGT AEA, IT at beneficiary rate, bare trust IHT treatment). (2) Income tax distribution mechanism : discretionary trusts can distribute to lower-rate beneficiaries - effectively converting settlor's high-rate income to beneficiary's lower-rate income. £20k distributed to non-working spouse / adult child = ~£3k IT vs £8k if retained as settlor income. (3) CGT base cost reset on hold-over election : gifts in/out of trust with Section 165 TCGA hold-over defer CGT. Useful for business asset succession planning. (4) BPR / APR asset protection : business / agricultural assets in trust still qualify for BPR / APR (up to £1m cap from April 2026). 100% IHT relief on qualifying assets continues. (5) Asset protection from beneficiaries' creditors : not directly tax but valuable - protected from divorce / bankruptcy of beneficiaries. (6) Cross-generational planning : trust can hold assets for multiple generations without each transfer triggering 40% IHT charge. NON-tax benefits : control over timing/conditions of beneficiary access, protection of vulnerable adults, business continuity, family wealth coordination, philanthropic legacy. Many situations now favour Family Investment Companies over trusts: lower ongoing tax rates (CT 25% vs trust 45%), more flexible governance, no 10-yearly periodic IHT. Specialist advice essential : trust vs FIC vs direct gift decision depends on specific circumstances.

Comprehensive UK trust taxation guide for 2026/27. 6 trust types compared (bare / IIP / discretionary / A&M / disabled / pilot). £500 standard rate band, $45% trust IT rate, $39.35% dividend rate, $24% trust CGT + £1,500 AEA. Relevant Property regime - 20% entry + 10-yearly 6% periodic + exit charges. Section 624 ITTOIA 2005 settlor anti-avoidance + Section 86 TCGA non-resident attribution. Trust Registration Service mandatory from 2022. April 2025 offshore trust reform + LTR rules. FIC vs trust decision matrix. 12-FAQ. Statute - IHTA 1984, ITTOIA 2005, TCGA 1992.

6 UK trust types compared

Type	Description	IT	CGT	IHT
Bare trust	Beneficiary has absolute right to assets/income at majority (18/16 Scotland). Common for minor children.	Income taxed at beneficiary marginal rate	CGT at beneficiary marginal rate	Assets in beneficiary's estate from outset
Interest-in-Possession (IIP)	Life tenant has right to income for life; remaindermen receive capital on life tenant death. Common in second-marriage / disability planning.	Income taxed on life tenant	Trustees pay on disposals (24% higher rate)	Pre-2006 IIP: in life tenant's estate; post-2006 IIP: relevant property regime
Discretionary trust	Trustees have discretion over income/capital distribution among beneficiaries. Most flexible.	45% trust IT rate (or 39.35% for dividends) on income retained	Trustees pay 24% CGT + £1,500 AEA	Relevant Property regime: entry charge + 10-yearly 6% periodic + exit charges
Accumulation + Maintenance	Pre-2006 trust type for children. Largely abolished by Finance Act 2006 reforms; existing ones transitioned.	Income accumulated to capital, taxed at trust rates	Trustees pay 24% CGT + £1,500 AEA	Largely transitioned to discretionary regime post-2008
Disabled Person's trust	For beneficiary with mental/physical disability or chronic medical condition. Tax-favoured.	Effectively taxed at beneficiary rate	Full CGT AEA available (vs £1,500 cap on other trusts)	Treated as bare trust for IHT - in beneficiary estate
Pilot trust	Trust created with nominal amount, expanded later via Will or lifetime additions.	As discretionary trust	As discretionary trust	Relevant Property regime; multiple pilots may share NRB

Frequently asked questions

What is a UK trust + why are they used?

Trust: legal arrangement where one person (settlor) transfers property to another (trustees) to hold for benefit of third party (beneficiaries). Statutory basis: Trustee Act 1925 + 2000, common law equity. Common UK trust uses: (1) Family estate planning: pass wealth across generations while controlling timing/conditions. (2) Vulnerable beneficiary protection: minors, disabled, spendthrift - trust manages assets responsibly. (3) Tax planning: lifetime transfers reduce settlor's estate + potentially reduce IHT (subject to 7-year rule). (4) Asset protection: trustee-held assets shielded from beneficiaries' creditors / divorce / bankruptcy. (5) Charitable purposes: charitable trusts tax-exempt. (6) Pension scheme: occupational pensions structured as trusts. (7) Will trusts: testamentary trusts in Wills - common for second marriages with children from prior relationship. (8) Business succession: family business shares held in trust for next generation. (9) Bare trust for children: JISA-like structures for child savings. Key elements: SETTLOR creates trust + transfers property; TRUSTEES hold legal title + administer; BENEFICIARIES have beneficial / equitable interest; TRUST DEED governs powers + duties. Three certainties required (Knight v Knight 1840): certainty of intention, certainty of subject matter, certainty of objects. Modern UK trust environment: increasingly complex post-2006 tax reforms. Family Investment Companies often preferred for some objectives. Trusts remain essential for vulnerable beneficiaries + cross-generational planning + Wills.

What are the main UK trust types?

Six main trust types: (1) Bare trust: beneficiary has absolute equitable ownership. Trustees hold legal title only. Income/gains taxed on beneficiary's tax return at their marginal rate. Common for minor children's accounts. (2) Interest-in-Possession (IIP) trust: life tenant has right to income; remaindermen receive capital on life tenant's death. Pre-March 2006 IIPs taxed favourably (in life tenant's estate for IHT). Post-2006 IIPs taxed under Relevant Property regime. (3) Discretionary trust: trustees have discretion over income/capital distribution among class of beneficiaries. Most flexible + most tax-complex. (4) Accumulation + Maintenance (A&M) trust: pre-2006 trust for minor children. New A&M trusts largely abolished by Finance Act 2006; existing transitioned to discretionary by April 2008. (5) Disabled Person's trust: for beneficiary with qualifying disability. Tax-favoured - bare trust treatment for IHT (no Relevant Property regime). Section 89 IHTA 1984. (6) Charitable trust: established for charitable purposes. Tax-exempt for IT + CGT + IHT. Charities Act 2011. Other categories: Pilot trusts: small initial trusts expanded later. Asset Protection Trusts: offshore variants - significant UK anti-avoidance rules apply. Mixed trusts: hybrid types combining elements. Section 73 trusts: very specific narrow category for parental settlements. Choosing trust type: depends on objectives (control, tax efficiency, beneficiary protection, simplicity). Specialist legal + tax advice essential.

How is income taxed in UK discretionary trusts?

Discretionary trust income: complex tax structure favouring distribution over accumulation. Standard rate band £500: first £500 of trust income taxed at "standard rates" (20% for non-dividends, 8.75% for dividends). Section 491 ITA 2007. From April 2024 reduced from £1,000 (was £1,000 since 2009). Trust rate above £500 standard band: 45% on non-dividend income (matching additional-rate). 39.35% on dividends. Worked example - £20k trust income: £500 at 20% / 8.75% (standard band) = ~£75-100. £19,500 at 45% (non-dividend) = £8,775. Total IT ~£8,850 (44% effective). Significantly above individual marginal rates. Distribution mechanism: trustees can distribute income to beneficiaries. Beneficiary receives "net" distribution + Section 481 ITTOIA 2005 tax credit. Beneficiary pays IT at their marginal rate but gets credit for trust IT already paid. Tax credit reclaim: low-rate beneficiaries can reclaim part of trust IT (if beneficiary marginal rate < trust 45%). Basic-rate beneficiary receives £55 net from trust + £45 credit = £100 gross income. At basic-rate 20% = £20 IT. Refund £45 - £20 = £25 from HMRC. Practical implication: discretionary trusts highly tax-inefficient for accumulating income. Distribution to lower-rate beneficiaries dramatically reduces effective rate. Most trusts distribute all income annually as a result.

How is CGT calculated for trustees?

Trust CGT: trustees pay CGT on disposals from trust assets. Statutory basis: Section 65 TCGA 1992 (trust gains) + Section 87 TCGA 1992 (non-resident trust gains). Trust CGT rates 2026/27: 24% on most assets (post-October 2024 reform aligned all rates). 28% on residential property (separate higher rate). Trust AEA: £1,500 annual exempt amount for most trusts. Lower than individual £3,000 AEA. Settlor's other trusts can reduce this further - if settlor has multiple trusts, AEA divided across them with £600 minimum. Disabled Person's trust + Vulnerable beneficiary trust: full £3,000 AEA available (same as individual). Worked example - trust sells shares for £15,000 gain: £15,000 - £1,500 AEA = £13,500 taxable. At 24% = £3,240 CGT. Compare to individual: same £15k gain - £3,000 AEA = £12,000 × 24% = £2,880. Trust pays £360 more on same gain due to lower AEA. Distribution of capital: distributing capital to beneficiary is typically NOT a CGT disposal (no consideration received by trust). But beneficiary takes on trust's base cost - subsequent disposal by beneficiary triggers their CGT calculation. Hold-over election (Section 165 TCGA 1992): gifts to/from trusts can elect to hold over gain. Trust takes on settlor's base cost (gift in). Beneficiary takes on trust's base cost (gift out). Avoids immediate CGT but defers to next disposal. Section 86 TCGA non-resident trust: complex anti-avoidance attributing offshore trust gains to UK-resident settlor.

What is the 10-yearly IHT periodic charge on discretionary trusts?

Relevant Property Regime: discretionary trusts (+ post-2006 IIPs) face IHT charges on entry, every 10 years, and on exit. Statutory basis: Sections 64-69 IHTA 1984. Entry charge: 20% IHT on settlement value above settlor's available NRB (£325k). E.g. £500k into trust = (£500k - £325k) × 20% = £35,000 IHT on entry. 10-yearly periodic charge: 6% of value above NRB every 10 years from trust creation. Statutory basis: Section 64 IHTA 1984. Worked example - £1m trust at 10-year anniversary: £1,000,000 - £325,000 NRB = £675,000. £675k × 6% = £40,500 IHT charge every 10 years. Exit charges: when capital leaves trust to beneficiary BETWEEN 10-year anniversaries, exit charge applies. Calculated as fraction of next periodic charge. Section 65 IHTA 1984. Worked example exit charge: £100k distributed 3 years into 10-year cycle. £100k × 6% × (30 quarters of 40 used) = £4,500 exit charge approximately. NRB sharing across multiple trusts: anti-avoidance from 2015 (Section 80B IHTA 1984) - multiple settlements by same settlor share single NRB chronologically. Reduction strategies: (a) keep settlement below NRB - no entry, periodic, or exit charges; (b) split assets across multiple settlors (separately funded); (c) use Business Property Relief / Agricultural Property Relief eligible assets (100% relief up to £1m cap from April 2026); (d) use disabled person's trust (bare trust treatment). Compare to other transfer routes: outright gifts use 7-year PET rule (potentially zero IHT if survive 7 years). Trusts have certainty of charges + control benefit.

How are bare trusts taxed?

Bare trust = simplest form. Beneficiary has absolute equitable interest from outset. Trustees hold legal title for administrative convenience only. Common use cases: (1) Minor children's accounts: parent / grandparent transfers money to bare trust until child reaches 18. Common name on bank account: "John Smith as Trustee for Alice Smith". (2) Custodian accounts: investment platforms hold assets as bare trustee for adult investor. (3) Lump sum settlements: vulnerable adult given lump sum via bare trust to manage practical aspects. Income Tax: income taxed AS IF beneficiary owns directly. Beneficiary declares all income on own SA / tax return. Beneficiary's PA / band / allowances apply. Critical for parent settlor + minor child: Section 629 ITTOIA 2005 anti-avoidance rule. If parent settles >£100 of income on minor child, all income TAXED ON PARENT. Cap at £100 means anything above the limit unhelpful for parental tax planning. Grandparent settlements + non-parental gifts NOT caught by Section 629. CGT: gains taxed on beneficiary. Beneficiary's £3,000 AEA + 18% / 24% rates apply. IHT: bare trust assets ARE in beneficiary's estate from outset. Settlor's PET rule applies to original transfer (7-year rule). Trust register: bare trusts generally registrable on Trust Registration Service (TRS) if assets >£100 OR taxable. JISA + Child Trust Fund: technically bare trusts but with specific tax-advantaged regulations - £9,000 JISA annual allowance tax-free.

What is the settlor anti-avoidance under Section 624 ITTOIA?

Settlor-interested trust rules: complex anti-avoidance preventing settlor from extracting tax benefits by settling income-producing assets into trust then receiving benefit themselves. Statutory basis: Sections 619-648 ITTOIA 2005 (Income Tax) + Section 86 TCGA 1992 (CGT). Section 624 ITTOIA: trust income arising from settlement where SETTLOR has retained interest is attributed back to settlor + taxed at settlor's marginal rate (regardless of who actually receives the income). "Retained interest": defined broadly. Includes settlor / settlor's spouse / civil partner / unmarried partner / minor child receiving any benefit from trust. Worked example: husband settles £200k of dividend-paying shares into discretionary trust for wife + adult children. Wife is beneficiary. Husband-settlor STILL taxed on all trust income because wife (his spouse) is beneficiary. Trust income £10k = £4,000 IT for husband at 40%. Even if income retained in trust: settlor still personally liable for tax. Trustees can recover paid tax from settlor under Section 646 ITTOIA. Section 86 TCGA non-resident trust attribution: similar rules for CGT - non-UK trust gains attributed to UK-resident settlor if settlor / family retained interest. Escape: settlor must EXCLUDE themselves + spouse + minor children from ALL benefit. Trust deed must contain irrevocable exclusion clauses. Discretionary trusts can include "default beneficiary" arrangement excluding settlor. Strategic implication: settlor-interested trusts are tax-INEFFICIENT for current income (settlor pays tax). Used for asset protection / control / estate planning purposes despite tax cost. For tax efficiency, settlor must give up all economic interest - true estate-planning gifts.

What is the Trust Registration Service (TRS)?

TRS: HMRC online register of UK trusts. Mandatory since 6 October 2020 (Section 75-79 Money Laundering Regulations 2017 + 5th Anti-Money Laundering Directive). Registration required for: (1) All UK express trusts (whether taxable or not) since 1 September 2022. Includes bare trusts. (2) Trusts with UK tax liability: any tax year with IT / CGT / IHT / SDLT liability. (3) Non-UK trusts with UK property / UK business assets. Exemptions: pension scheme trusts, charitable trusts, certain insurance trust arrangements, will trusts in 2-year administration period. Information required: settlor name + address + date of birth + NI / UTR + nationality + tax residence; trustees same details; beneficiaries (named or class description); trust deed key terms + assets held + value. Update obligation: changes to trust details must be reported within 90 days. Annual confirmation required for taxable trusts. Penalties: £100 for late registration. £500 if >3 months. Further penalties at HMRC discretion. Beneficiaries' access to TRS data: HMRC can share data with other government agencies + (in limited cases) private parties demonstrating legitimate interest. Privacy advocates have raised concerns. Compliance importance: TRS non-compliance increasingly enforced. Combined with tax compliance reviews (CRS, CARF, etc.) HMRC has comprehensive trust visibility. Practical advice: existing trusts not yet registered need urgent compliance. New trusts must register within 90 days of trustees becoming UK-resident or trust generating UK tax liability.

How does the 7-year rule apply to trusts?

Lifetime gifts to trusts: NOT treated as Potentially Exempt Transfers (PETs). Different IHT treatment vs gifts to individuals. Discretionary trust gift = Chargeable Lifetime Transfer (CLT): immediate 20% IHT on value above settlor's NRB at gift date (Section 7 IHTA 1984). If settlor dies within 7 years, full 40% IHT charge re-applied with credit for 20% already paid. IIP trust gift: Pre-March 2006 IIPs were PETs (zero IHT if 7-year survival). Post-2006 IIPs: treated as CLTs same as discretionary. Bare trust gift: STILL a PET (treated as direct gift to beneficiary). 7-year rule + taper relief applies. Disabled Person's trust gift: PET treatment if all conditions met (Section 89 IHTA 1984). Worked example discretionary trust: settle £500k into discretionary trust + settlor has full NRB. Excess £175k × 20% = £35k entry IHT. Settlor pays £35k IHT + transfers £500k of value into trust. Settlor dies within 7 years: full 40% rate applied. £175k × 40% = £70k - £35k already paid = £35k additional IHT. Taper relief reduces but only after NRB exhausted. 7+ year survival: original £35k IHT stands. No additional charge. Trust now properly outside settlor's estate but ENTERS Relevant Property regime - 10-yearly periodic + exit charges continue. Compare bare trust: same £500k gift to bare trust + 7+ year survival = £0 IHT. Plus trust assets in beneficiary's estate from outset. Often simpler + cheaper than discretionary for outright giving.

Are there any tax benefits of trusts in 2026/27?

Significantly reduced tax benefits post-2006 reforms. Most pure tax-driven trust structures unwound or non-cost-effective. Remaining genuine tax benefits: (1) Vulnerable beneficiary protection: Disabled Person's trust + Section 89 IHTA 1984 trust offer favourable treatment (full CGT AEA, IT at beneficiary rate, bare trust IHT treatment). (2) Income tax distribution mechanism: discretionary trusts can distribute to lower-rate beneficiaries - effectively converting settlor's high-rate income to beneficiary's lower-rate income. £20k distributed to non-working spouse / adult child = ~£3k IT vs £8k if retained as settlor income. (3) CGT base cost reset on hold-over election: gifts in/out of trust with Section 165 TCGA hold-over defer CGT. Useful for business asset succession planning. (4) BPR / APR asset protection: business / agricultural assets in trust still qualify for BPR / APR (up to £1m cap from April 2026). 100% IHT relief on qualifying assets continues. (5) Asset protection from beneficiaries' creditors: not directly tax but valuable - protected from divorce / bankruptcy of beneficiaries. (6) Cross-generational planning: trust can hold assets for multiple generations without each transfer triggering 40% IHT charge. NON-tax benefits: control over timing/conditions of beneficiary access, protection of vulnerable adults, business continuity, family wealth coordination, philanthropic legacy. Many situations now favour Family Investment Companies over trusts: lower ongoing tax rates (CT 25% vs trust 45%), more flexible governance, no 10-yearly periodic IHT. Specialist advice essential: trust vs FIC vs direct gift decision depends on specific circumstances.

How do non-UK resident trusts work?

Offshore trusts: trusts where trustees are resident outside UK. Historically used by UK non-doms for tax efficiency. Post-April 2025 reform significantly restricted these benefits. Pre-April 2025 offshore trust position: foreign-source income + gains accumulated in offshore trust were outside UK tax until remitted. UK non-dom settlors could benefit indirectly. April 2025 reforms: (1) Protected Settlement regime abolished: pre-April 2025 trusts settled by non-doms had "protected" status - assets stayed outside settlor's estate even after deemed-dom. From April 2025 protection largely removed. (2) Long-Term Resident (LTR) rules: settlor who becomes LTR (10 of 20 years UK resident) brings worldwide trust assets into UK IHT scope. (3) Pre-2025 trusts grandfathering: limited - assets in trust at 5 April 2025 retain some protection but additions / changes void. Anti-avoidance: Section 86 TCGA 1992 attributes offshore trust gains to UK-resident settlor with retained interest. Section 720-721 ITTOIA 2005 attributes offshore trust income to UK-resident settlor. Section 731 ITA 2007 transfer of assets abroad rules. Practical implications: offshore trusts for UK-resident settlors are largely tax-inefficient post-April 2025 reform. Most established offshore trusts require restructuring. Existing non-doms: TRF (Temporary Repatriation Facility) 2025-2028 allows pre-April 2025 trust reserves to be remitted at 12-15% flat rate. See FIG / TRF deep-dive. For new non-dom arrivers: 4-year FIG window provides tax-free treatment of foreign income/gains directly - no need for offshore trust structure during this period.

What is the future of UK trust taxation 2027 onwards?

Trust tax landscape evolving rapidly. 2024 Government Review: HMRC consultation on simplifying trust tax structures - particularly addressing complexity that drives most family wealth toward Family Investment Companies (FIC) instead. Likely changes 2026-2028: (1) Standard rate band review: £500 standard rate band may rise or fall. Some advocate elimination (taxing all trust income at 45%); others advocate increase to align with growing trust use. (2) Vulnerable beneficiary rule expansion: definition of "disabled" + "vulnerable" may broaden, allowing more tax-favoured trust treatment. (3) FIC vs trust tax alignment: government considering aligning tax treatment to remove the FIC advantage that's driving wealth transfer choices. (4) 10-yearly periodic charge calculation simplification: complex Section 66 IHTA 1984 mechanics may be replaced with simpler flat rate. (5) Trust Registration Service expansion: post-money-laundering compliance further integration with HMRC tax compliance systems. (6) Offshore trust crackdown continuation: Section 86 TCGA + Section 720 ITTOIA enforcement intensifying. (7) Charitable trust scrutiny: HMRC reviewing trust structures masquerading as charitable for tax advantage. (8) Cross-border trust harmonisation: post-Brexit, UK trust law may align with international standards via OECD work. Practical guidance: existing trusts should be reviewed regularly. New estate planning increasingly considers FIC + LLP alternatives alongside trusts. Specialist STEP-qualified solicitor + tax adviser essential for any trust planning post-2024.