Do You Pay Tax on Money Held in a Trust in the UK?

Trusts are one of the most effective estate planning tools available under English and Welsh law — a legal arrangement that has existed for over 800 years. At MP Estate Planning, we regularly advise clients on the tax implications of trusts, because understanding how trust taxation works is essential for making informed decisions about protecting your family’s wealth.

As a specialist in trust funds and their tax implications, we help clients navigate the different taxes that can apply to trusts — including income tax, capital gains tax (CGT), and inheritance tax (IHT). Getting this right matters for both trustees and beneficiaries.

Key Takeaways

• Trusts are a legal arrangement — not a separate legal entity — where trustees hold assets for the benefit of named beneficiaries.
• Trusts are subject to income tax, capital gains tax, and potentially inheritance tax, each with specific rates and allowances.
• Discretionary trusts pay income tax at 45% on non-dividend income and 39.35% on dividends, with only the first £1,000 taxed at basic rate.
• The annual CGT exempt amount for trusts is currently £1,500 — half the individual allowance.
• Despite these tax charges, trusts remain one of the most powerful tools for asset protection, care fee planning, and inheritance tax efficiency when structured correctly.

Understanding Trusts in the UK

Understanding how trusts work is essential for anyone looking to protect their family’s assets and plan their estate effectively. Trusts offer a structured and flexible way to safeguard wealth, ensure assets pass to the right people, and potentially achieve significant inheritance tax savings.

What is a Trust?

A trust is a legal arrangement — not a legal entity — where one person (the settlor) transfers assets to nominated individuals (the trustees) to hold and manage for the benefit of specified people (the beneficiaries). The trustees become the legal owners of the assets, but they must manage them according to the terms of the trust deed and in the best interests of the beneficiaries.

In English law, the primary classification of trusts is based on when they take effect: a lifetime trust is created during the settlor’s lifetime, while a will trust takes effect on death. Within these categories, trusts are classified by how they operate — discretionary, bare, or interest in possession. A lifetime trust can be either revocable or irrevocable, though for asset protection and IHT planning, irrevocable trusts are the standard approach. A revocable trust provides no IHT benefit because HMRC treats the assets as still belonging to the settlor (a settlor-interested trust).

Types of Trusts Commonly Used

There are several types of trusts commonly used in England and Wales, each with different tax treatment and levels of protection:

• Bare Trusts: The beneficiary has an absolute right to the capital and income once they reach age 18. The trustee is merely a nominee. Because the beneficiary has an immediate entitlement, bare trusts offer no protection against care fees, divorce, or creditors, and are not IHT-efficient. Under the principle in Saunders v Vautier, the beneficiary can collapse the trust entirely once they reach majority.
• Interest in Possession Trusts: An income beneficiary (life tenant) has the right to receive income or use trust property during their lifetime. The capital passes to a remainderman when the life interest ends. These are commonly used in will trusts to prevent sideways disinheritance — for example, ensuring a surviving spouse can live in the family home while protecting the capital for the children. Post-March 2006 interest in possession trusts are generally treated as relevant property for IHT, unless they qualify as an immediate post-death interest (IPDI) or a disabled person’s interest.
• Discretionary Trusts: Trustees have absolute discretion over when and how to distribute income and capital among the beneficiaries. No beneficiary has a legal right to anything — and this is precisely what makes discretionary trusts the most protective. They can last up to 125 years and account for roughly 98-99% of the trusts we set up at MP Estate Planning.
• Accumulation Trusts: A form of discretionary trust where income is accumulated within the trust rather than distributed. These are now treated under the same tax regime as discretionary trusts.

Purposes of Setting Up a Trust

Trusts are set up for various reasons, including:

By understanding the different types of trusts and their purposes, individuals can make informed decisions about their estate planning needs, taking into account the trust tax rules and UK trust tax rates that apply to each structure. As we often say: trusts are not just for the rich — they’re for the smart.

Tax Fundamentals for Trusts

Understanding the tax implications of trusts is crucial for effective financial planning. Trusts in the UK can be subject to three main taxes: income tax, capital gains tax (CGT), and inheritance tax (IHT). The tax treatment depends heavily on the type of trust and the nature of its income or gains.

Overview of Trust Taxation

It’s important to understand that a trust is not a separate legal entity — it is a legal arrangement where the trustees are the legal owners of the assets. However, for tax purposes, HMRC does treat certain trusts as a separate taxable “person,” meaning the trust has its own tax obligations distinct from those of the beneficiaries.

The tax treatment varies significantly depending on the type of trust. Bare trusts are taxed as if the beneficiary directly owns the assets — income and gains are assessed on the beneficiary personally. Discretionary trusts and accumulation trusts, by contrast, are taxed at the trust rate, which is considerably higher than individual rates. Interest in possession trusts sit somewhere in between, depending on when they were created and their specific terms.

Tax Treatment of Income Generated by Trusts

The income generated by trusts — whether from property rental, savings interest, dividends, or other investments — is taxable. For discretionary and accumulation trusts, the first £1,000 of income is taxed at the basic rate (20% for non-dividend income, 8.75% for dividends). Everything above £1,000 is taxed at the trust rate: 45% for non-dividend income and 39.35% for dividend income. If the same settlor has created multiple trusts, that £1,000 basic rate band is divided between them.

When trustees make income distributions to beneficiaries, the beneficiary receives a tax credit for the tax already paid by the trust. If the beneficiary is a basic-rate taxpayer (or has unused personal allowance), they can reclaim some or all of this tax. This mechanism is known as the trust tax pool, and understanding it is essential for trustees managing distributions efficiently.

Trustees are legally required to file an SA900 Trust and Estate Tax Return with HMRC each year that the trust has taxable income or gains. They must ensure all tax is calculated correctly and paid on time — failure to do so can result in penalties and interest charges.

Taxation on Money Held in a Trust

Understanding how trusts are taxed is crucial for managing your financial obligations. The answer to “do you pay tax on money held in a trust?” is: it depends on what type of trust it is, what income or gains it generates, and what happens when distributions are made.

Do You Pay Income Tax?

Yes — trusts that generate income are liable for income tax. The key question is: who pays it and at what rate?

For bare trusts, the income is taxed as the beneficiary’s own income, using the beneficiary’s personal tax rates and allowances. For discretionary trusts, the trustees pay income tax at the trust rate — 45% on non-dividend income and 39.35% on dividends (with the first £1,000 at basic rate). When distributions are later made to beneficiaries, the beneficiary receives a tax credit for the tax already paid by the trust. If the beneficiary’s marginal rate is lower than the trust rate, they can reclaim the difference from HMRC.

For a trust that holds only the family home (with no rental income being generated), there is typically no income to tax — meaning no income tax liability arises at all. This is a crucial point that many people overlook: the vast majority of Family Home Protection Trusts generate zero taxable income.

Do You Pay Capital Gains Tax?

Capital Gains Tax (CGT) applies when trustees dispose of trust assets at a gain. The current CGT rates for trusts are 24% on residential property gains and 20% on other assets. Trusts have an annual exempt amount of £1,500 (half the individual allowance), above which CGT becomes payable.

An important point: transferring your main residence into a trust while you’re living in it does not normally trigger a CGT charge, because Private Residence Relief (PRR) applies at the point of transfer. Additionally, holdover relief is available when assets are transferred into or out of certain trusts, meaning no immediate CGT charge arises — the gain is effectively deferred until the asset is eventually sold.

Beneficiaries do not separately pay CGT on capital distributions they receive, provided the trustees have properly accounted for any CGT due on the disposal.

Trust Tax Rates Explained

Here is a summary of the key tax rates that apply to trusts in England and Wales:

• Income tax (non-dividend): 45% at the trust rate (first £1,000 at 20% basic rate)
• Income tax (dividends): 39.35% at the trust rate (first £1,000 at 8.75%)
• Capital gains tax (residential property): 24%
• Capital gains tax (other assets): 20%
• Annual CGT exempt amount: £1,500

These rates may appear high, but context matters. Many family trusts — particularly those holding a home that isn’t being rented out — generate little or no taxable income, meaning the effective tax burden can be minimal. The real value of a trust lies in the protection it provides: shielding assets from care fees, preventing sideways disinheritance, and achieving inheritance tax savings that can dwarf any trust-level income tax. To understand more about how trusts can be used for inheritance tax planning, specialist advice is essential.

The Role of Trustees in Tax Matters

Trustees are at the forefront of ensuring that trusts comply with UK tax laws. Their role goes well beyond simply looking after the assets — they carry personal legal liability for the trust’s tax affairs, making it essential that they understand their obligations.

Responsibilities of Trustees

Trustees have a fiduciary duty to manage the trust assets in the best interests of the beneficiaries and to ensure full compliance with all relevant tax legislation. This includes:

• Filing the SA900 Trust and Estate Tax Return with HMRC each year the trust has taxable income or gains
• Calculating and paying income tax and CGT on the trust’s income and gains
• Maintaining the trust tax pool — a running record of tax paid, which determines how much tax credit can be passed to beneficiaries on distributions
• Keeping accurate financial records for the trust, including all income, expenditure, gains, and distributions
• Ensuring the trust is registered on the HMRC Trust Registration Service (TRS) within 90 days of creation — this is mandatory for all UK express trusts, including bare trusts

Trustees who fail to meet their tax obligations can face penalties from HMRC. Seeking specialist advice is strongly recommended — as Mike Pugh often says, “the law — like medicine — is broad. You wouldn’t want your GP doing surgery.”

How Trustees Handle Tax Payments

Handling tax payments is a critical part of a trustee’s role. Trustees must pay tax on the income and gains generated by the trust, even if that income is not distributed to beneficiaries. For discretionary trusts, this means paying the trust rate of 45% on non-dividend income and 39.35% on dividends.

Trustees must calculate the trust’s tax liability each year, taking into account the £1,000 basic rate band, any available reliefs (such as holdover relief for CGT), and the trust’s annual CGT exempt amount of £1,500. Tax payments must be made by 31 January following the end of the tax year, with payments on account potentially required for larger trust incomes.

We recommend that trustees work with a specialist trust tax adviser to ensure compliance and to make the most of available reliefs. Proper management of the trust’s tax position not only avoids penalties but also maximises the value of distributions to beneficiaries.

Personal Allowances and Trusts

When it comes to trusts, understanding how personal allowances and trust-specific allowances interact is crucial for minimising tax liabilities for both trustees and beneficiaries.

Income Tax Allowance for Beneficiaries

Beneficiaries of trusts retain their own personal allowance for income tax purposes, just like any other UK taxpayer. The current personal allowance is £12,570. This means that if a beneficiary receives a distribution from a discretionary trust, that income is added to their other income — but they can use their personal allowance against it if they haven’t already used it elsewhere.

Crucially, because discretionary trusts pay tax at the trust rate (45% for non-dividend income), the beneficiary receives a tax credit for the tax already paid. If the beneficiary is a basic-rate taxpayer — or has unused personal allowance — they can reclaim the difference from HMRC via their Self Assessment return. This mechanism can result in substantial tax refunds, effectively reducing the overall tax burden on trust income significantly.

Capital Gains Tax Allowance for Trusts

Trusts have their own annual exempt amount for capital gains tax, which is currently £1,500 — half the individual allowance. This means that trustees can realise gains up to £1,500 in a tax year without incurring any CGT. Above that threshold, gains are taxed at 24% for residential property and 20% for other assets.

Where the same settlor has created multiple trusts, this £1,500 allowance is divided equally among them (with a minimum of one-fifth of the full individual allowance per trust). There are exceptions for trusts for disabled persons or vulnerable beneficiaries, which receive more generous treatment.

Understanding and utilising these allowances effectively — along with reliefs such as holdover relief and Private Residence Relief — can help minimise the overall tax burden on trusts. Trustees should take specialist advice to ensure they are managing the trust’s tax position as efficiently as possible.

Distributions from Trusts

Distributions from trusts can significantly affect the financial situation of beneficiaries, and understanding their tax implications is essential for effective planning. The tax treatment varies depending on whether the distribution is classified as income or capital.

Tax Implications of Distributions

Distributions from trusts fall into two categories: income distributions and capital distributions. Income distributions come from the trust’s income — rental income, dividends, interest, and so on. When a discretionary trust makes an income distribution, it carries a 45% tax credit (the tax already paid by the trust). The beneficiary is treated as having received gross income that has already been taxed at 45%.

Capital distributions — where trustees distribute capital from the trust to a beneficiary — have a different tax treatment. When assets leave a discretionary trust, an exit charge may apply under the relevant property regime. However, for most family trusts where the value is within the nil rate band, this exit charge is typically zero. The beneficiary does not pay CGT on a capital distribution they receive; any CGT liability falls on the trustees at the point the asset is disposed of.

Key Tax Considerations for Distributions:

• Income distributions carry a tax credit at the trust rate (45%), and beneficiaries who pay tax at a lower rate can reclaim the excess from HMRC.
• Capital distributions may trigger an exit charge under the relevant property regime — but for trusts within the nil rate band, this is typically nil.
• The trust tax pool tracks cumulative tax paid and determines how much tax credit can accompany distributions to beneficiaries.

How Distributions Affect Beneficiaries’ Taxes

Beneficiaries must report income distributions from trusts on their Self Assessment tax return. The gross income (before the trust’s tax deduction) is added to their other income, and they are then assessed at their own marginal rate. Because the trust has already paid tax at 45%, there are three possible outcomes:

If the beneficiary is a higher-rate (40%) or additional-rate (45%) taxpayer, they may owe little or no extra tax. If they are a basic-rate (20%) taxpayer, they can reclaim the difference — potentially getting back 25 percentage points of the tax paid. If they have unused personal allowance, they may reclaim even more.

Accurate record-keeping is essential. Trustees should provide beneficiaries with an R185 (Trust Income) certificate showing the gross income and tax deducted, enabling the beneficiary to complete their tax return correctly and reclaim any overpaid tax.

Reporting Requirements for Trusts

When it comes to trusts in the UK, understanding the reporting requirements is crucial for compliance with HMRC. Trustees have a legal obligation to report the trust’s income, gains, and distributions — and all UK express trusts must also be registered on the Trust Registration Service (TRS).

Tax Returns for Trusts

Trustees must file an SA900 Trust and Estate Tax Return with HMRC for any tax year in which the trust has taxable income or chargeable gains. This return requires detailed information about:

• All sources of income — rental income, savings interest, dividends, business income, and any other receipts.
• Capital gains or losses from the disposal of trust assets, including property, shares, or other investments.
• Distributions made to beneficiaries during the tax year, including details of the trust tax pool and tax credits issued.
• Any IHT charges arising, such as periodic 10-year charges or exit charges under the relevant property regime.

For more information on the responsibilities of trustees, visit https://www.gov.uk/trusts-taxes/trustees-tax-responsibilities.

Information Required for Reporting

Beyond the annual tax return, trustees must maintain comprehensive records of all trust transactions, assets, and liabilities. Under the 5th Money Laundering Directive, all UK express trusts — including bare trusts — must be registered on the TRS within 90 days of creation. The TRS register is not publicly accessible (unlike Companies House), providing an additional layer of privacy for families.

Trustees must also keep the TRS entry up to date, notifying HMRC of changes to trustees, beneficiaries, or the trust’s details within specific timeframes. Accurate record-keeping is essential to ensure compliance with UK trust tax rules and to avoid potential penalties — HMRC can charge penalties for failure to register or update trust information.

Understanding the applicable UK trust tax rates is crucial for calculating the trust’s tax liability correctly. We strongly recommend that trustees work with a specialist who understands trust taxation to ensure everything is reported accurately and on time.

How Trusts Are Taxed on Gains

Trusts in the UK are subject to capital gains tax when trust assets are disposed of at a profit. Understanding how these gains are calculated and when tax must be paid is essential for trustees managing trust assets responsibly.

Assessing Gains in a Trust

Assessing gains in a trust involves calculating the difference between the disposal proceeds and the asset’s base cost. The base cost is typically the original acquisition cost (or market value at the time the asset was transferred into the trust), adjusted for any allowable expenditure such as improvements. For example, if a trust acquired a buy-to-let property for £150,000, spent £20,000 on qualifying improvements, and later sold it for £250,000, the chargeable gain would be £80,000 (£250,000 minus £170,000 base cost).

After deducting the trust’s annual exempt amount of £1,500, the remaining £78,500 would be subject to CGT at 24% (the residential property rate), resulting in a tax liability of £18,840. This illustrates why it’s important for trustees to maintain detailed records of all acquisition costs and improvement expenditure.

Crucially, certain reliefs can significantly reduce or eliminate CGT charges. Holdover relief is available when assets are transferred into or out of discretionary trusts, meaning no immediate CGT charge arises — the gain is deferred. Additionally, if the settlor’s main residence is transferred into trust while they’re living in it, Private Residence Relief (PRR) typically means no CGT is payable at the point of transfer. For more detailed information, see our resource on preparing for capital gains tax updates.

Timing of Tax Payments on Gains

The timing of CGT payments depends on the type of asset disposed of. For UK residential property, trustees must report and pay CGT within 60 days of completion of the sale, using HMRC’s capital gains tax on UK property service. This is a common trap for trustees who are unaware of the shorter deadline — failure to report within 60 days can result in penalties and interest.

For non-property gains, CGT is reported on the trust’s SA900 tax return and is payable by 31 January following the end of the tax year in which the gain was realised. For example, if a trust sells shares in June 2025, the gain is reported on the 2025/26 tax return, and the tax is due by 31 January 2027.

Trustees should plan ahead to ensure the trust has sufficient liquidity to meet its tax liabilities when they fall due. Specialist advice is invaluable here — not just for calculating the correct liability, but for identifying reliefs and planning the timing of disposals to make the most efficient use of the trust’s annual exempt amount.

Trusts and Inheritance Tax

When setting up a trust, understanding the inheritance tax implications is crucial. IHT can apply at several points in a trust’s life — when assets are transferred in, at regular intervals during the trust’s existence, and when assets are distributed out. However, with proper planning, many families find that the IHT charges on their trust are minimal or even zero.

Overview of Inheritance Tax Implications

Inheritance tax operates differently depending on the type of trust. Discretionary trusts fall under the relevant property regime, which involves three potential IHT charges:

• Entry charge: When assets are transferred into a discretionary lifetime trust, this is a Chargeable Lifetime Transfer (CLT). The rate is 20% on any value exceeding the settlor’s available nil rate band (£325,000). For most families transferring their home — with the average home in England worth around £290,000 — the entry charge is zero. A married couple using two separate trusts could potentially shelter up to £650,000 with no entry charge.
• 10-year periodic charge: Every 10 years, the trust is assessed for IHT on the value of its assets above the nil rate band. The maximum rate is 6%, but for most family home trusts within the NRB, this charge is again zero.
• Exit charge: When assets leave the trust (distributed to beneficiaries), an exit charge may apply, calculated proportionally to the last periodic charge. If the periodic charge was nil, the exit charge will be nil. Even in cases where an exit charge does apply, the rate is typically less than 1% — a fraction of the protection the trust provides.

For bare trusts, the position is different — the assets are treated as belonging to the beneficiary for IHT purposes, so there is no relevant property regime. However, this also means bare trusts offer no IHT planning advantage.

Exemptions and Reliefs Available

There are several important exemptions and reliefs that can reduce or eliminate IHT liabilities:

The combined maximum IHT-free allowance for a married couple passing their home to direct descendants is currently £1,000,000 (£650,000 NRB + £350,000 RNRB). However, the NRB has been frozen since 2009 — meaning inflation has steadily dragged more ordinary homeowners into the IHT net. With the average home in England now worth around £290,000, even a modest home plus savings and a pension can push a couple’s estate well above the threshold. From April 2027, inherited pensions will also become liable for IHT, making proactive planning more important than ever.

By understanding these rules and working with a specialist, families can structure their trusts to minimise IHT while ensuring their assets are protected. Plan, don’t panic — that’s the key.

Legal Advice on Trusts and Tax

Navigating the complexities of trust taxation requires specialist knowledge. Trusts are subject to income tax, capital gains tax, and inheritance tax — each with its own rules, rates, reliefs, and reporting deadlines. Getting it wrong can be costly.

When to Consult a Tax Adviser

We recommend seeking specialist advice at several key points:

• Before setting up a trust: To ensure the right type of trust is chosen for your circumstances and that the tax implications are fully understood.
• When transferring assets into the trust: Particularly property, where CGT, stamp duty, and Land Registry requirements must be considered.
• At each 10-year anniversary: To assess any periodic IHT charge and ensure the trust is structured efficiently.
• When making distributions: To calculate exit charges, manage the trust tax pool, and ensure beneficiaries understand their reporting obligations.
• When circumstances change: Marriage, divorce, death of a trustee, or changes in legislation (such as the upcoming changes to BPR/APR from April 2026 and inherited pension rules from April 2027).

The Importance of Professional Guidance

Trust law is a specialist area. As Mike Pugh often explains: “The law — like medicine — is broad. You wouldn’t want your GP doing surgery.” A general solicitor or high-street accountant may not have the depth of knowledge needed to properly advise on trust structures, the relevant property regime, holdover relief, or the interaction between the NRB, RNRB, and trust charges.

Key benefits of specialist guidance include:

1. Ensuring the trust deed is drafted correctly from the outset — mistakes in the trust deed can have permanent tax consequences.
2. Proper management of the trust tax pool to maximise tax credits for beneficiaries on distributions.
3. Identifying reliefs (holdover relief, PRR, BPR, APR) that can reduce or eliminate tax charges.
4. Ongoing compliance support — SA900 filing, TRS registration and updates, 60-day CGT reporting for property disposals.

When you compare the cost of a trust — typically from £850 for straightforward arrangements — to the potential cost of care fees (£1,100-£1,500+ per week), a 40% IHT charge on your estate, or a divorce settlement that could claim half the family home, professional guidance is one of the most cost-effective investments you can make. That’s the equivalent of just one or two weeks of care home fees — a one-time cost versus an ongoing drain that can continue until the estate is depleted to £14,250. Not losing the family money provides the greatest peace of mind above all else.

Examples of Tax Scenarios in Trusts

Understanding the tax implications of trusts can be complex, but real-world examples can help clarify how the rules work in practice. Let’s look at some common scenarios that families encounter.

Income Tax Scenarios

Consider a discretionary trust that owns a buy-to-let property generating £12,000 per year in rental income. The trustees must report this income and pay tax at the trust rate. The first £1,000 is taxed at the basic rate of 20% (£200), and the remaining £11,000 is taxed at 45% (£4,950), giving a total income tax liability of £5,150.

Now suppose the trustees distribute £6,000 of this income to a beneficiary — a retired parent with total income below their personal allowance. The beneficiary receives the £6,000 along with a tax credit showing that 45% tax has already been paid. Because their personal income is below £12,570, they can reclaim the full tax credit from HMRC. The effective tax rate on that distribution, for the beneficiary, is zero.

By contrast, a trust holding only the family home (with the settlor continuing to live there under the terms of the trust, such as a Family Home Protection Trust) generates no rental income and therefore has no income tax liability at all. This is by far the most common scenario for families we work with.

Capital Gains Tax Scenarios

Suppose a trust sells an investment property for £280,000 that was originally acquired at £200,000, with £15,000 in qualifying improvements. The chargeable gain is £65,000 (£280,000 minus £215,000). After deducting the trust’s £1,500 annual exempt amount, the taxable gain is £63,500. At the 24% residential property rate, the CGT liability is £15,240. This must be reported and paid within 60 days of completion.

However, if the trust had instead used holdover relief when the property was originally transferred in, and the property’s value at transfer matched the acquisition cost, the base cost carried forward would reflect the original price — meaning the gain on eventual sale would be the same but no CGT was triggered at the point of transfer. This demonstrates why holdover relief is such a valuable planning tool.

These examples illustrate that the answer to “do you pay tax on money held in a trust?” depends entirely on the type of trust, the assets it holds, and the income or gains it generates. For a family that simply places their home into a discretionary trust for protection purposes, the ongoing tax charges can be remarkably low — often nil. England invented trust law 800 years ago, and it remains one of the most effective ways to protect family wealth. Seeking specialist advice on trust taxation in the UK ensures compliance and helps families make the most of available reliefs.