Quick answer
A settlor-interested trust in England and Wales is a trust where the person who creates it (the settlor) retains some benefit from the assets transferred, typically allowing them to receive income or capital during their lifetime. These trusts are generally subject to Income Tax on trust income and may trigger Inheritance Tax considerations, particularly if the settlor dies within 7 years of creation, as the transfer into trust may be treated as a potentially exempt transfer. From 6 April 2024, settlor-interested trusts also fall within the anti-avoidance rules that apply to trusts where the settlor can benefit, affecting how trust income is taxed. The settlor’s retained interest must be carefully structured to balance asset protection with tax efficiency, especially given the current nil-rate band of £325,000 (gov.uk — Inheritance Tax) for Inheritance Tax purposes in England and Wales. This guide explains settlor-interested trusts in 2026/27, how they interact with current tax rules and thresholds, and the key considerations for protecting family assets while retaining personal benefit.
Last reviewed: 24 May 2026 by the MP Estate Planning editorial team. Jurisdiction: England and Wales. Scotland and Northern Ireland have different probate and intestacy rules; the IHT thresholds are UK-wide.
Protecting your family’s assets is a top priority, and a settlor-interested trust can play a vital role in achieving this goal. We understand the importance of securing your family’s future, and we’re here to guide you through the process.
A settlor-interested trust is a type of trust where the individual who establishes it retains some benefits linked to the assets they’ve transferred. This means that you, as the settlor, can benefit from the trust during your lifetime.
By creating such a trust, you can ensure that your assets are managed and distributed according to your wishes, while also providing for your loved ones.
Key Takeaways
- Understand the basics of a settlor-interested trust and its benefits.
- Learn how to protect your family’s assets using this type of trust.
- Discover the advantages of retaining an interest in the trust assets.
- Find out how to ensure your assets are managed according to your wishes.
- Explore the role of settlor-interested trusts in securing your family’s future.
What is a Settlor-Interested Trust?
In the realm of UK trust law, settlor-interested trusts occupy a distinct position, offering flexibility and control. This type of trust allows the settlor, or the individual who creates the trust, to benefit from the trust assets alongside other beneficiaries.
Definition and Key Features
A settlor-interested trust is defined as a trust where the settlor or their spouse or civil partner benefits from the trust. The key features include the settlor’s ability to receive income or capital from the trust assets. This characteristic sets it apart from other types of trusts where the settlor may not benefit directly.
The settlor-interested trust can take various forms, including:
- Interest in possession trusts
- Accumulation trusts
- Discretionary trusts
According to Tolley’s guidance on settlor-interested trusts, understanding the tax implications is crucial for effective trust management.
How it Differs from Other Trusts
Unlike other trusts, a settlor-interested trust allows the settlor to maintain a level of control and benefit from the trust assets. This is a significant distinction, as it enables the settlor to continue enjoying the assets while also providing for other beneficiaries.
For a comprehensive guide on setting up a trust fund in the UK, including settlor-interested trusts, you can refer to MP Estate Planning’s guide. This resource provides detailed steps and considerations for establishing a trust that meets your needs.
In summary, settlor-interested trusts offer a unique combination of flexibility, control, and benefit for the settlor, making them an attractive option for many individuals in the UK.
The Role of the Settlor
The settlor plays a pivotal role in the creation and operation of a settlor-interested trust. As the individual who establishes the trust, the settlor’s decisions have a lasting impact on the trust’s structure and benefits.
Responsibilities of the Settlor
The settlor is responsible for transferring assets into the trust, which is a critical step in establishing the trust. This process involves legally conveying ownership of the assets to the trust, ensuring that the trust is properly funded and able to operate as intended.
The settlor must also ensure that the trust is properly established, complying with all relevant UK laws and regulations. This includes selecting the trustees and defining the terms of the trust, including who the beneficiaries will be.
Key Responsibilities:
- Transferring assets into the trust
- Selecting trustees
- Defining the terms of the trust
- Ensuring compliance with UK laws
How the Settlor Can Benefit
The settlor can benefit from the trust through income or capital distributions, depending on the terms of the trust. This allows the settlor to potentially receive financial benefits while also achieving their estate planning goals.
| Benefit Type | Description |
|---|---|
| Income Distributions | Regular payments from the trust’s income |
| Capital Distributions | Lump sum payments from the trust’s capital |
By understanding the role of the settlor, individuals can better navigate the complexities of settlor-interested trusts and make informed decisions about their estate planning.
Legal Framework Governing Settlor-Interested Trusts
Navigating the legal framework of settlor-interested trusts requires a comprehensive understanding of UK legislation and case law. The legal framework governing these trusts is multifaceted, involving various acts and regulations that impact their tax implications and operational guidelines.
Relevant UK Legislation
The UK legislation governing settlor-interested trusts includes several key acts. The Income Tax Act 2007 and the Finance Act 2008 are particularly significant, as they outline the tax treatment of these trusts. For instance, the settlor-interested trust rules dictate that income from such trusts is taxable on the settlor, ensuring that the settlor cannot avoid income tax by diverting income to the trust.
To understand the implications of these rules, it’s essential to consult resources that provide a step-by-step guide on setting up a UK trust. This can help in navigating the complexities of trust law and tax obligations.
Important Case Law
Case law also plays a crucial role in shaping the legal framework for settlor-interested trusts. Landmark cases have established precedents that influence how these trusts are treated for tax purposes. For example, the HMRC v. Jones case highlighted the importance of considering the settlor’s intentions and the trust’s overall structure when determining its tax liability.
Understanding these legal precedents is vital for anyone involved in setting up or managing a settlor-interested trust. It ensures compliance with current laws and regulations, minimizing the risk of disputes or tax liabilities.
Tax Implications of Settlor-Interested Trusts
Three rule changes you may need to consider (2026/27)
1. Pensions become subject to IHT from 6 April 2027. Most unused defined-contribution pension pots currently sit outside the estate for IHT — that ends on 6 April 2027 (gov.uk policy paper). HMRC estimates around 10,500 estates will face IHT for the first time as a result.
2. Business and agricultural property reliefs capped at £2.5m per person from 6 April 2026. Above the cap, only 50% relief applies — effective IHT of 20%. AIM shares dropped to 50% relief and do not use the £2.5m allowance (Saffery — APR/BPR reforms).
3. The NRB, RNRB and £2m taper threshold are frozen until 5 April 2031 following the 2024 and 2025 Budgets (gov.uk — NRB and RNRB freeze). With inflation, more estates will be pulled into IHT each year — a process commonly called “fiscal drag.”
Navigating the tax landscape of settlor-interested trusts is essential for maximizing their benefits. As experienced professionals, we guide you through the complexities of tax implications associated with these trusts.
Income Tax Considerations
Settlor-interested trusts are subject to income tax on the income they generate. The settlor’s interest in the trust can significantly affect the income tax treatment. As noted by HMRC, “the settlor is taxable on the income of the trust if they have retained an interest in it” (source). This means that the settlor must report the trust’s income on their tax return.
Key income tax considerations include:
- Income from the trust is treated as the settlor’s income for tax purposes.
- The settlor must report this income on their Self Assessment tax return.
- The trust itself may also be required to file a tax return, depending on its income level.
It’s crucial to understand that the income tax implications can vary depending on the type of income generated by the trust, such as rental income, dividend income, or interest income.
Inheritance Tax Consequences
In addition to income tax, settlor-interested trusts also have inheritance tax (IHT) implications. The treatment of the trust for IHT purposes depends on whether the settlor has retained an interest in the trust. According to estate planning experts, settlor-interested trusts can be effective for IHT planning, but careful consideration is necessary.
Some key IHT considerations for settlor-interested trusts include:
- The trust is typically considered part of the settlor’s estate for IHT purposes.
- Transfers into the trust may be subject to IHT, depending on the settlor’s available nil-rate band.
- On the settlor’s death, the value of the trust is aggregated with their other assets for IHT calculations.
As with any tax planning, it’s essential to stay up-to-date with the latest regulations and seek professional advice to ensure compliance and optimize tax efficiency.
Advantages of Settlor-Interested Trusts
Settlor-interested trusts offer numerous benefits for individuals looking to manage their assets effectively in the UK. These trusts are particularly appealing due to their unique combination of flexibility, control, and asset protection.
Flexibility and Control
One of the primary advantages of settlor-interested trusts is the level of flexibility and control they offer. As a settlor, you can retain the power to make decisions regarding the trust assets, ensuring that your wishes are carried out. This flexibility is particularly valuable in changing financial circumstances or when family dynamics shift.
The ability to be a beneficiary as well as the settlor means you can benefit from the trust assets while still maintaining control. This dual role allows for more effective management of the trust, aligning with your financial goals and family needs.
Protection of Assets
Settlor-interested trusts also provide a significant level of asset protection. By placing assets into a trust, you can shield them from potential creditors or financial risks. This protection is crucial for individuals looking to safeguard their family’s financial future.
Moreover, these trusts can be structured to minimize the impact of inheritance tax, ensuring that more of your estate is passed on to your loved ones. The protection and preservation of your assets for future generations are key benefits of settlor-interested trusts.
In summary, settlor-interested trusts in the UK offer a compelling combination of flexibility, control, and asset protection. These benefits make them an attractive option for individuals seeking to manage their assets effectively while ensuring their family’s financial security.
Disadvantages to Consider
When considering a settlor-interested trust, it’s crucial to weigh the potential downsides alongside the benefits. While these trusts offer flexibility and control, there are significant risks and limitations to be aware of.
Potential Risks
One of the primary concerns with settlor-interested trusts is the potential impact of tax legislation changes. As the settlor is also a beneficiary, any changes in tax laws can directly affect the trust’s income and gains, potentially leading to unforeseen tax liabilities.
- Changes in income tax rates can impact the trust’s tax burden.
- Shifts in inheritance tax legislation can affect the trust’s overall value.
- Potential increases in capital gains tax can reduce the trust’s assets.
Additionally, settlor-interested trusts can be vulnerable to creditor claims, as the settlor’s interest in the trust can be considered an asset. This could potentially lead to the trust being challenged in the event of the settlor’s insolvency or other financial difficulties.
Limitations on Access to Funds
While settlor-interested trusts are designed to provide flexibility, there are limitations on accessing the trust funds. The trust deed will typically outline the conditions under which distributions can be made, and these conditions must be adhered to.
| Limitation | Description | Impact |
|---|---|---|
| Trust Deed Restrictions | Conditions outlined in the trust deed that govern distributions. | Limits the settlor’s ability to access funds freely. |
| Trustee Discretion | The trustee has the discretion to make distributions based on the trust deed. | Distributions are subject to the trustee’s approval. |
| Beneficiary Needs | Distributions are typically made based on the needs of the beneficiaries. | May limit the settlor’s access to funds if not considered a priority beneficiary. |
It’s also worth noting that the settlor’s access to trust funds can be influenced by the trustee’s discretion and the needs of other beneficiaries. This means that while the settlor has an interest in the trust, their ability to access funds may be restricted.
Setting Up a Settlor-Interested Trust
When setting up a settlor-interested trust, it’s essential to understand the roles and responsibilities involved. Establishing such a trust requires careful planning and a clear understanding of the legal and tax implications. We guide you through the process to ensure that your settlor-interested trust is set up correctly and effectively.
Steps Involved in Establishment
Setting up a settlor-interested trust involves several key steps. First, you need to decide on the trust’s purpose and the assets it will hold. This decision will influence the trust’s structure and the choice of trustee. We recommend considering the following:
- Define the trust’s objectives and the beneficiaries.
- Choose the assets to be placed in the trust.
- Draft the trust deed, outlining the terms and conditions.
- Appoint a trustee who will manage the trust.
Each of these steps is crucial to the successful establishment of the trust. By carefully planning and executing these steps, you can ensure that your settlor-interested trust is effective.
Choosing a Trustee
Choosing the right trustee is a critical decision when setting up a settlor-interested trust. The trustee is responsible for managing the trust assets and making decisions in accordance with the trust deed. The ideal trustee should be trustworthy, competent, and have a good understanding of trust law.
When selecting a trustee, consider the following factors:
- The trustee’s experience in managing trusts.
- Their ability to make impartial decisions.
- Their understanding of the settlor’s intentions and the beneficiaries’ needs.
You may also consider appointing a professional trustee, such as a solicitor or a trust company, who can bring expertise and independence to the role. This can be particularly beneficial for complex trusts or when the settlor wishes to ensure that the trust is managed impartially.
By carefully choosing a trustee and following the necessary steps, you can establish a settlor-interested trust that meets your needs and provides for your beneficiaries. We are here to guide you through every step of the process, ensuring that your trust is set up correctly and effectively.
Common Misconceptions
Despite their benefits, settlor-interested trusts are often shrouded in misconception. Many people in the UK have misunderstandings about how these trusts work and their potential advantages.
Trusts Are Only for the Wealthy
One common misconception is that trusts, including settlor-interested trusts, are only for the wealthy. However, this is not necessarily the case. Settlor-interested trusts can be useful for a wide range of individuals, not just those with significant assets.
For instance, settlor-interested trusts can be beneficial for:
- Individuals looking to protect their assets for future generations
- Those seeking to maintain some control over the trust assets
- People who want to ensure that their beneficiaries are taken care of
As noted by a legal expert, “Settlor-interested trusts offer flexibility and control, making them an attractive option for many.”
“The flexibility of settlor-interested trusts makes them suitable for a broader range of people than is often assumed.”
Trusts Offer Complete Asset Protection
Another misconception is that trusts offer complete asset protection. While settlor-interested trusts can provide a level of protection, they are not foolproof. It’s essential to understand the limitations and potential risks involved.
| Protection Aspect | Settlor-Interested Trusts |
|---|---|
| Asset Protection | Offers some protection but not absolute |
| Creditor Protection | Varies depending on the trust’s structure |
| Tax Implications | Subject to income and inheritance tax |
For more information on putting property into a trust in the UK, you can visit this page to learn about protecting your assets.
Seeking Professional Advice
When setting up a settlor-interested trust in the UK, it’s crucial to seek professional advice to ensure you understand the implications and comply with the relevant laws. We have guided you through the key aspects of settlor-interested trusts, but the complexity of trust law requires expert insight.
Navigating Trust Law
Consulting a solicitor can help you navigate the intricacies of trust law and ensure your settlor-interested trust is established correctly. They will provide guidance on the responsibilities of the settlor and the tax implications of the trust.
Expert Guidance for Settlor Trusts
By seeking professional advice, you can ensure that your settlor trust UK is set up to achieve your goals while minimizing potential risks. Our team is dedicated to providing clear, accessible guidance on estate planning, including settlor-interested trusts.
FAQ
What is a settlor-interested trust?
A settlor-interested trust is a type of trust where the settlor, or the person who creates the trust, retains an interest in the trust assets, allowing them to benefit from the trust during their lifetime.
How does a settlor-interested trust differ from other types of trusts?
The settlor’s ability to benefit from the trust sets it apart from other types of trusts, as it allows them to maintain a level of control and involvement with the trust assets.
What are the tax implications of a settlor-interested trust?
The income tax considerations for settlor-interested trusts can be complex, as the settlor’s income from the trust is subject to income tax, and the trust’s tax liability will depend on the type of trust and the settlor’s circumstances.
What are the benefits of using a settlor-interested trust?
One of the key advantages of a settlor-interested trust is the ability to retain control over the trust assets while still benefiting from them, providing flexibility and protection of assets.
What are the potential downsides of a settlor-interested trust?
While settlor-interested trusts offer several benefits, there are also potential risks to consider, such as the impact of tax legislation changes and limitations on accessing the funds.
How do I set up a settlor-interested trust?
Establishing a settlor-interested trust requires careful planning, including selecting a suitable trustee to manage the trust assets and ensuring that the trust is properly established.
Do I need professional advice to set up a settlor-interested trust?
Yes, consulting a solicitor can help you navigate the complexities of trust law and ensure that your settlor-interested trust is established correctly, providing you with peace of mind and protection for your assets.
Are settlor-interested trusts only for the wealthy?
No, settlor-interested trusts can be useful for a wide range of individuals, not just the wealthy, as they provide a flexible and effective way to manage and protect assets.
Can I benefit from a settlor-interested trust during my lifetime?
Yes, as the settlor, you can benefit from the trust during your lifetime, and the trust can be structured to provide for your needs and those of your beneficiaries.
What happens to the trust assets after I pass away?
The trust assets will be distributed according to the terms of the trust, which can provide for your beneficiaries and ensure that your wishes are carried out.
Gift with Reservation of Benefit, Capital Gains Tax, and the Real Cost of Retained Interest
One of the most consequential questions our team considers before recommending a settlor-interested trust is whether the structure creates a Gift with Reservation of Benefit (GRoB) under the Finance Act 1986. The answer shapes the entire inheritance tax planning outcome and, in our experience, is frequently misunderstood at the point of drafting.
Is a Settlor-Interested Trust a GRoB?
In most cases, yes. Where a settlor transfers assets into trust but retains — or may benefit from — an interest in that trust, HMRC will typically treat the gifted assets as subject to a reservation of benefit. This means the assets remain within the settlor’s taxable estate for IHT purposes, as though no gift was ever made. The seven-year clock for potentially exempt transfers does not begin to run while the reservation subsists. Detailed HMRC guidance on this point is available in the HMRC Inheritance Tax Manual at IHTM14301. Where a settlor releases their interest entirely, the reservation may cease — but the asset is then treated as a fresh gift at that point, restarting any taper relief clock. For clients whose primary concern is reducing their IHT exposure, this is a significant limitation that our team weighs carefully against the benefits of retained control.
How This Interacts with the Pre-Owned Assets Tax
Even where a GRoB technically ceases — for example, because the settlor formally relinquishes their interest — HMRC may instead charge the Pre-Owned Assets Tax (POAT) under the Finance Act 2004 Schedule 15. POAT is an annual income tax charge on the benefit the former donor is treated as receiving from the asset. It can apply even where the settlor no longer has a formal entitlement, provided they previously contributed to the acquisition of the asset now held in trust. This is a nuanced area and one where specialist advice from a regulated solicitor or tax adviser is strongly recommended before any restructuring.
Capital Gains Tax: Holdover Relief Restrictions and the CGT Uplift
Settlor-interested trusts also carry specific Capital Gains Tax consequences that are often overlooked. Under section 169B of the Taxation of Chargeable Gains Act 1992, holdover relief is not available when assets are transferred into a settlor-interested trust. This means any gain crystallised on the transfer into trust will typically be taxable immediately, rather than being deferred until the trustees dispose of the asset. Additionally, the CGT uplift on death — which rebases assets to their market value at the date of death — may be lost or complicated where GRoB applies, since the asset is treated as remaining in the estate anyway. For business owners transferring trading assets or investment property, this interaction between holdover relief restrictions and GRoB exposure is a central factor in whether a settlor-interested structure, a discretionary trust, or a bare trust better serves the client’s overall plan.
Common Questions About Settlor-Interested Trusts
Is a settlor interested trust a GRoB?
Generally, yes. Where the settlor retains the ability to benefit from the trust — whether through income, capital, or even a discretionary power that could be exercised in their favour — HMRC will typically treat the arrangement as a Gift with Reservation of Benefit under the Finance Act 1986. This means the trust assets ordinarily remain within the settlor’s estate for inheritance tax purposes. The practical consequence is that a settlor-interested trust does not typically achieve IHT removal while the settlor’s interest persists. Our team considers this the single most important planning question before recommending this structure.
How is a settlor interested trust taxed?
The tax treatment operates across three main heads. For income tax, the settlements legislation at ITTOIA 2005 sections 619 to 648 treats trust income as the settlor’s own income, regardless of whether it is actually paid to them. Trustees may first pay tax at the trust rate — currently 45% on non-dividend income and 39.35% on dividend income for 2024/25 — but the settlor can then reclaim a credit for tax paid at source against their own liability. For Capital Gains Tax, holdover relief is typically unavailable on transfer into a settlor-interested trust, meaning gains may crystallise immediately. For Inheritance Tax, the GRoB rules mean assets generally remain in the estate. The modern settlements legislation applies in its current form from 9 March 1999, a date that remains relevant where clients hold grandfathered pre-existing arrangements.
What is the point of a settlor interested trust?
Despite the tax drawbacks, settlor-interested trusts serve legitimate purposes in specific circumstances. They allow a settlor to transfer legal ownership and control of assets to trustees — useful for asset protection, succession planning, and managing assets for vulnerable beneficiaries — while retaining a safety net of potential access. For blended families, they can ring-fence assets for children from a previous relationship while still permitting the settlor to benefit if circumstances change. For business owners, they may form part of a wider structure where flexibility of access outweighs the IHT cost. Our team typically recommends this structure where control and protection are the primary goals, rather than tax reduction.
Who is the settlor for IHT purposes?
Under ITTOIA 2005 and the associated IHT provisions, the definition of settlor is broad. It includes any person who directly creates a settlement, but also anyone who provides funds for a settlement — including indirect arrangements. HMRC may treat a person as settlor even where they have not signed a trust deed, for example where a dividend waiver results in income being redirected to a spouse’s trust, or where a partner in a business arrangement causes income to accumulate within a settlement. The wide definition is designed to prevent avoidance through interposed steps, and our team routinely considers it when reviewing partnership structures and family company arrangements.
What is a non-settlor interested trust?
A non-settlor interested trust is one in which neither the settlor nor their spouse or civil partner can benefit under the terms of the trust. Where this condition is met, the settlements legislation at ITTOIA 2005 ss 619–648 does not apply to attribute trust income back to the settlor. Instead, income is taxed in the hands of the trustees or beneficiaries in the usual way. Non-settlor interested discretionary trusts are therefore commonly used where the settlor genuinely wishes to make an outright transfer — accepting the IHT and CGT consequences of doing so — without retaining any personal access. The trade-off is a genuine loss of control, which is not appropriate for every client profile.