We explain, in plain terms, how the tax position shifts when trustees direct payments so they go straight to a beneficiary. This matters for who pays the tax and who files the Self Assessment.
We will walk through the key points: what counts as directed payments, how trust wording and entitlement affect outcomes, and where problems often arise. Typical pinch points include bank interest, dividends and rental profits. Timing of payments also changes who reports and who pays tax.
Our aim is to set clear expectations. First identify the trust type and the deed wording. Then confirm whether payments are properly directed to the beneficiary. Finally, complete the right return or returns to avoid penalties and family disputes.
For extra help on life interest arrangements see our guidance on life interest trusts.
Key Takeaways
- Directed payments can move tax liability from trustees to the beneficiary.
- Check the trust deed and who is entitled before assuming who pays.
- Watch bank interest, dividends and rental receipts for common issues.
- Timing of payment affects Self Assessment obligations.
- Clear records and prompt returns reduce disputes and penalties.
Understanding mandated income and why HMRC treats it differently
When trustees tell a payer to send money straight to a beneficiary, the path of payment changes. That change can alter who reports the amount for tax purposes and who must pay tax.
What it means in practice
Mandating simply means instructing the payer — such as a bank or platform — to pay the trust’s receipts directly to the person entitled to them. This is common in interest possession arrangements where a life tenant is due the income as it arises.
How reporting and liability change
- Reporting: The beneficiary includes the amounts on their Self Assessment.
- Payment: The beneficiary will usually pay the tax based on their own band.
- Bank transfers: Moving cash from a trustee account is not the same as a valid instruction to the payer.
| Scenario | Who receives | Who reports for tax purposes |
|---|---|---|
| Direct payment by payer | Beneficiary receives | Beneficiary reports and may pay tax |
| Trustees withdraw then pay | Beneficiary receives | Trustees usually report and settle |
| Life tenant under interest possession | Beneficiary receives | Beneficiary reports if payment was instructed |
Check your trust type first: the tax rules depend on the structure
Start by identifying what kind of arrangement you have — the tax outcome depends on that single fact.
Interest in possession and life interest beneficiaries
An interest in possession means one person, the life interest beneficiary, has the right to the income while capital passes later. In everyday terms, one family member receives regular receipts and another inherits the capital.
Accumulation and discretionary arrangements
With accumulation or discretionary trusts, trustees decide whether to pay out or retain receipts. That usually leaves trustees facing the tax liability and filing duties.
Bare trusts and settlor-interested cases
A bare trust treats the beneficiary as the owner for tax. They report receipts personally and can use personal allowances.
Settlor-interested arrangements bring the settlor into the picture under settlements legislation. This can shift tax back to the settlor even if someone else benefits.
- Why it matters: the same £1,000 in one case can be reported by trustees, in another by the individual beneficiary, and in a third by the settlor.
For practical steps on accessing funds, see our guidance on access a trust fund.
| Arrangement | Who reports | Typical outcome |
|---|---|---|
| Interest in possession | Beneficiary if payments instructed | Beneficiary taxed on receipts |
| Discretionary / accumulation | Trustees | Trustees taxed at trust rates |
| Bare trust | Beneficiary as owner | Personal allowances apply |
| Settlor-interested | Settlor | Settlor bears tax liability |
hmrc mandated income trust rules in practice for interest in possession trusts
When a life interest beneficiary receives payments straight from a payer, the tax paperwork often moves with them.
What changes when income goes directly to the income beneficiary
We often see that, where an interest possession arrangement is in place, the beneficiary includes the sums on their Self Assessment and will usually pay tax aligned to their personal bands.
What stays with the trustees even when income is mandated
The trustees still manage the assets. They must keep accounts and prove the instruction to pay the entitled income.
Trustees may still: deal with other reporting, show records to resolve queries and be responsible for taxes not passed to the beneficiary.
Common reporting outcomes when the beneficiary completes Self Assessment
- The beneficiary reports the payment on their tax return and claims relevant allowances.
- If a payer reports to the trust while the beneficiary reports personally, HMRC queries can follow.
- Quarterly distributions from managers need clear mandate evidence to avoid mismatches.
Practical example: a distribution paid on 5 April can be treated in either tax year. Clear dates and bank evidence stop mistakes and reduce the chance of queries or extra estate tax adjustments.
| Situation | Who reports | Key action |
|---|---|---|
| Direct payer to beneficiary | Beneficiary on Self Assessment | Keep mandate and bank evidence |
| Payer reports to trustees but paid out | Trustees must explain; beneficiary may still report | Co‑ordinate statements to avoid mismatch |
| Quarterly manager distributions | Usually beneficiary if instructed | Confirm schedule and record dates |
Income Tax rates for trusts and the £500 tax-free amount
We outline the practical effect of the £500 allowance and the different rates that apply to dividend-type receipts and bank interest.
When the £500 amount applies: most trusts receive a £500 tax-free threshold. If total receipts exceed this amount, tax is due on the full sum, not just the excess. Bare arrangements are treated differently; the beneficiary may be taxed as owner instead.
Trustees and the dividend allowance
Importantly, trustees do not get the personal dividend allowance that individuals enjoy. That means dividend-type receipts held in the hands of trustees face trust rates from the first pound.
Applicable rates at a glance
| Arrangement | Dividend-type rate | Other income rate (eg bank interest) |
|---|---|---|
| Accumulation / discretionary | 39.35% | 45% |
| Interest in possession (trustee element) | 8.75% | 20% |
Multiple trusts and the £500 split
If a settlor controls several accumulation/discretionary funds, the £500 is divided between them. Where there are five or more such funds, each effectively gets a minimum of £100.
Quick tax year reminder: confirm which tax year receipts fall into. Timing affects the rates, the allowance allocation and who should report the tax liability.
How trustees calculate taxable trust income and handle deductions
A neat breakdown of receipts makes calculating taxable amounts much simpler for trustees.
We first split receipts into clear categories so each type gets the correct treatment.
Income types taxed differently
- Bank/building society interest: taxed at 20% for IIP trustees and treated separately from dividends.
- Dividends: carry a lower trustee dividend rate (8.75%) but are tracked on their own sheet.
- Rental profits from property: reduced by allowable property business expenses before tax.
Management expenses and deductions
Trust management expenses (TMEs) do not always mirror business costs. They can change what a beneficiary is entitled to.
Trustees should keep bank statements, platform reports and letting agent accounts. A simple allocation schedule helps reconcile different streams into a single total.
- Keep separate ledgers for interest, dividends and rent.
- Note which expenses reduce rental profits and which are TMEs.
- Use basic “tax pools” to track pre‑ and post‑deduction amounts.
Result: trustees can total taxable items accurately before deciding who reports or pays the tax.
How to complete reporting when income is not mandated
Where a payer sends receipts to the trustees, the default position is clear. The trustees must report the sums, pay any income tax due and file the trust and estate tax return when relevant.
Trustees’ responsibilities
We must file the trust and estate tax return or the estate tax return as required. Trustees should calculate taxable amounts, settle the tax bill and keep clear records.
Providing beneficiary tax information
Trustees must issue R185 statements so the beneficiary knows what was paid and what tax was taken off. “A clear R185 stops avoidable mistakes”
How beneficiaries declare income
A beneficiary reports amounts on SA107 Trusts etc and enters the gross figure where the trustee has already paid tax. This means the beneficiary can claim credit for tax paid.
Grossing up and practical example
If a beneficiary receives £800 net, the grossing up example is simple: the original sum was £1,000 with £200 tax paid. The beneficiary declares £1,000 and claims the £200 credit. Higher-rate taxpayers may owe more. Non-taxpayers can often reclaim excess tax.
Quick trustee checklist
- Issue annual R185 statements to each beneficiary.
- Prepare figures for the trust and estate tax return / estate tax return.
- Show gross amounts and tax paid so beneficiaries can complete SA107.
- Keep bank evidence and allocation notes for three years.
For specific guidance on bare arrangements, see our note on bare trust inheritance tax.
How to report and pay tax when income is mandated to the beneficiary
If a payer sends receipts directly to the entitled person, the recipient will normally carry the reporting and any resulting liability.
What to include on Self Assessment
The beneficiary should enter the gross amount received for each source. Use the section for trust-related receipts and match descriptions to bank and platform statements.
Include: gross sums, the date you receive them, and any tax already deducted so you can claim the credit.
How outcomes differ by taxpayer type
Basic-rate taxpayers may see little extra to pay once allowances apply.
Higher-rate taxpayers often face more to pay because the additional sums push them into a higher band.
Non-taxpayers should still report. If no tax is due they may reclaim any tax deducted.
Practical records to keep
- Payment dates and gross amounts.
- Bank evidence and platform distribution statements.
- A short allocation note explaining how each sum relates to entitlement.
“Clear allocation notes reduce disputes and make it easier to show what happened if asked later.”
When to seek advice: get help where wording is uncertain or payments come from mixed assets. Early advice avoids mistakes and unexpected liability across a tax year.
| What to keep | Why it matters | Action |
|---|---|---|
| Gross payment record | Shows taxable amount | Enter on Self Assessment and keep bank evidence |
| Tax deducted note | Allows credit claim | Record amount and source; attach to return figures |
| Allocation note | Resolves family queries and HMRC checks | Explain dates, sources and beneficiary entitlement |
Special situations that change liability: settlors, spouses and minor children
Some family arrangements quietly shift who carries the tax burden, even when someone else receives the cash.
When income is treated as the settlor’s under settlements legislation
Where the settlor retains influence or benefits a close relative, settlements legislation can apply. In these cases the law treats the receipts as the settlor’s for tax purposes.
Practical effect: even if a spouse or minor child gets the cash, the settlor may bear the tax liability and must be shown as responsible for tax paid.
How trustees account when the settlor is taxable
Trustees normally pay tax as the sums arise and file the Trust and Estate Tax Return. They must also give the settlor a clear statement showing amounts and tax paid.
What the settlor then does: report the figures on Self Assessment and claim credit for tax the trustees have already settled on their behalf.
“Cashflow and liability do not always match. Clear papers prevent family confusion.”
- Common triggers: payments to spouses or minor children when the settlor retains control.
- Trustees’ duty: keep evidence, pay the tax, and issue a statement promptly.
- Risk: families assume the recipient pays tax, but liability can remain with the settlor.
| Scenario | Who receives cash | Who has tax liability | Key trustee action |
|---|---|---|---|
| Settlor retains control; spouse benefits | Spouse | Settlor | Pay tax; issue statement to settlor |
| Settlor supports minor children | Minor children | Settlor | File return; record tax paid for settlor |
| Settlor-gift but retains interest | Named beneficiary | Settlor | Provide evidence and trustee accounts |
Trust Registration Service requirements and deadlines trustees must meet
Registering with the Trust Registration Service is a key admin step trustees must not overlook. The system exists to increase transparency and help prevent money laundering. It affects many estate arrangements and can feel urgent once you see the deadlines.
Which arrangements need registration
Most express trusts must be recorded, even if there is no current tax liability. There are limited exemptions, but trustees should check the scope carefully.
Deadlines and updates
New trusts generally must register within 90 days of creation. Changes — for example to trustees, beneficiary details or trust assets — must be updated within 90 days too.
Information to prepare
- Settlor details.
- Trustees names and contact info.
- Beneficiary names or class descriptions.
- Trust assets and values (for taxable cases).
After registration and penalties
Taxable trusts receive a UTR and non-taxable records get a URN. These identifiers matter for future returns and admin.
Penalties can start at £100 and grow the longer registration is delayed. While enforcement has often been light-touch, fines are real and avoidable. If you need guidance, see how to register a trust.
How to stay compliant year-on-year as a trustee or beneficiary
We recommend a short, repeatable routine to keep records tidy and risks low. Follow a simple timetable each tax year and you will avoid last-minute stress.
Annual checklist for the tax year
- Confirm receipts: list all income and gross amounts for the year.
- Check tax paid: note any tax deducted and who paid it.
- Issue statements: trustees should send R185 or equivalent to beneficiaries promptly.
- Store evidence: bank statements, platform reports and allocation notes for at least three years.
When to register for Self Assessment
If a beneficiary who does not usually file receives payments under a bare arrangement, they must register for Self Assessment by 5 October after the tax year in which the income arose.
When to seek professional advice
Get specialist advice for mixed assets, cross-border elements, unclear entitlements or estate planning that might change who must pay tax. Early help saves time and reduces risk.
“Consistent admin protects family assets and keeps the tax return straightforward.”
| Action | Who | Deadline / timing |
|---|---|---|
| Record gross receipts and tax paid | Trustees & beneficiary | Ongoing; finalised after 5 April each year |
| Issue beneficiary statements (R185) | Trustees | Shortly after 5 April |
| Register for Self Assessment | Beneficiary (if not usually filing) | By 5 October following the tax year |
| Seek professional advice | Trustees or beneficiary | When assets mix, wording unclear or cross-border issues arise |
Conclusion
Confirm the arrangement and the payer’s instruction before you assume who bears the tax. First identify the kind of trust and whether receipts pass directly to the named person.
Then follow a clear how-to path: check the correct income rates, decide who reports, and keep simple, dated records that match bank statements. Good papers prevent questions later.
Trustees must remember the £500 threshold and that dividend allowances do not apply to trustee-held receipts. Beneficiaries receiving payments should use the right Self Assessment pages and keep evidence to support figures.
Registering on the TRS and updating it is part of routine housekeeping for many estates and property cases. If a case feels messy, get advice early to save time, cost and stress — and to protect your family. secure your family’s future