The type of trust decides who pays tax on the income, at what rate, and whether the trust fund sits inside someone’s estate for Inheritance Tax. In a bare trust the beneficiary is taxed as if they owned the assets; in an interest in possession trust the trustees pay basic rate tax and the life tenant is taxed on what they are entitled to; in a discretionary trust the trustees pay the special trust rates and the fund is “relevant property” with ten yearly charges. A settlor interested trust overlays all of this by taxing the income on the settlor.

What are the main types of trust?

HMRC’s trusts guidance lists bare trusts, interest in possession trusts, discretionary trusts, accumulation trusts, mixed trusts, settlor interested trusts and non resident trusts, and stresses that each is taxed differently.

Bare trust
The trustee holds assets in their name, but the beneficiary is entitled to all the capital and income and can take it at 18 in England and Wales, or 16 in Scotland.
Interest in possession trust
The trustees must pass all the income, less expenses, to a beneficiary (often called the life tenant) as it arises. That beneficiary has no right to the capital itself.
Discretionary and accumulation trusts
The trustees decide what is paid, to whom, when and on what conditions, and may be able to add income to capital.
Mixed trust
Different parts of the fund follow different rules, and each part is taxed according to its own type.
Settlor interested trust
Any of the above where the settlor or their spouse or civil partner can benefit. This is an overlay, not a separate structure.

Trusts for vulnerable beneficiaries (a disabled person, or a child under 18 whose parent has died) can claim special treatment; see vulnerable beneficiary trusts.

How does income tax differ between them?

For 2026 to 2027 the position is:

Type Who pays Rate on dividends Rate on other income
Bare Beneficiary, on their own return Beneficiary’s own rates Beneficiary’s own rates
Interest in possession Trustees, then life tenant on what they are entitled to 10.75% 20%
Discretionary or accumulation Trustees 39.35% 45%
Settlor interested Trustees pay, settlor is taxed with credit Rate for the underlying type Rate for the underlying type

Most trusts pay no income tax if their income is no more than a tax free amount, normally £500, but once income exceeds it the whole amount is taxed. Where a settlor has more than one discretionary or accumulation trust the £500 is divided between them, down to £100 each where there are five or more. The £500 does not apply to a bare trust, because the income belongs to the beneficiary, who may be able to use their own Personal Allowance instead. Trustees do not get the dividend allowance.

Distributions also differ. Income from an interest in possession trust keeps its character in the life tenant’s hands with credit for the trustees’ tax. A discretionary payment carries a 45% tax credit, which the trustees must cover through the tax pool explained in discretionary trusts: income tax and the tax pool. For settlor interested trusts, the settlor is taxed on all the income even if none is paid out to them, and reports the tax the trustees have paid on their own return; see settlor interested trusts.

Finance Act 2026 adds a property trust rate and a savings trust rate, each 47%, from 2027 to 2028. They do not affect 2026 to 2027.

Who pays capital gains tax?

In a bare trust, section 60 of the Taxation of Chargeable Gains Act 1992 treats the assets as the beneficiary’s own and disregards the trustee, so gains are the beneficiary’s and handing the assets over at 18 is not a disposal. In every other type the trustees are chargeable.

  • Rate: trustees pay 24% from 6 April 2026, or 18% on gains qualifying for Business Asset Disposal Relief.
  • Annual exempt amount: £1,500 for 2026 to 2027, or £3,000 where a beneficiary is vulnerable. It can be reduced where the settlor has made more than one settlement since 6 June 1978.
  • Going in: putting an asset into a trust is a disposal at market value by the settlor (section 70). Hold over relief under section 260 is available where the gift is a chargeable transfer for Inheritance Tax, which covers most lifetime gifts into discretionary trusts, but section 169B blocks it where the settlor or spouse can benefit.
  • Coming out: when a beneficiary becomes absolutely entitled, the trustees are treated as disposing of the assets at market value. When an interest in possession ends on death, there may be no CGT.

Trustees must report and pay on UK residential property within 60 days of completion. More detail is in trustees and capital gains tax.

How does Inheritance Tax treat each type?

Bare trusts. A gift into a bare trust is a potentially exempt transfer, exempt if the donor survives 7 years. HMRC’s view in IHTM16068 is that a bare trust for a minor is not a settlement for Inheritance Tax even though trustees may accumulate income during the minority, and the property forms part of the beneficiary’s estate.

Relevant property trusts. Most assets in trust are relevant property: discretionary and accumulation trusts, and interest in possession trusts created in lifetime on or after 22 March 2006. Lifetime transfers into them that exceed the £325,000 threshold (taking account of chargeable transfers in the previous 7 years) are charged at 20% if the trustees pay. The trust then faces a charge on each ten year anniversary and an exit charge of up to 6% when property leaves; see the trust ten year charge.

Qualifying interests in possession. Interests created before 22 March 2006, transitional serial interests created between 22 March 2006 and 5 October 2008, immediate post death interests under a will or intestacy, and disabled persons’ interests are outside the relevant property regime. Instead the trust capital is treated as part of the life tenant’s estate when they die; see interest in possession trusts.

Settlor interested trusts. If the settlor keeps a benefit from what they gave, the gift is a gift with reservation: the 20% lifetime charge can apply and the assets still count in the settlor’s estate, with relief so that only the higher of the two charges is paid.

Trusts for bereaved minors and 18 to 25 trusts, and trusts for disabled beneficiaries, have their own reliefs from the ten yearly and exit charges.

How do the rules compare side by side?

Type Income tax CGT Inheritance Tax
Bare Beneficiary Beneficiary Gift is a PET; fund in beneficiary’s estate
Interest in possession (qualifying) Trustees 20% or 10.75%; life tenant taxed with credit Trustees 24% Fund in life tenant’s estate
Interest in possession (lifetime, after 22 March 2006) As above Trustees 24% Relevant property
Discretionary or accumulation Trustees 45% or 39.35%; tax pool Trustees 24% Relevant property
Settlor interested Settlor, with credit for trustees’ tax Trustees 24%; no hold over on entry Gift with reservation if settlor benefits

How might the same income be taxed under each type?

Illustration only. A trust fund receives £6,000 of UK dividends in 2026 to 2027. Because the income exceeds £500, all of it is taxable.

  • Bare trust for an adult grandchild: the trustees pay nothing. The grandchild includes £6,000 of dividends on their own return at their own rates.
  • Interest in possession trust: the trustees pay 10.75%, £645. The life tenant is taxed on £6,000 with credit for £645, paying more only if they are a higher or additional rate taxpayer.
  • Discretionary trust: the trustees pay 39.35%, £2,361, which enters the tax pool. Any income later paid out carries a 45% credit, so paying out all £3,639 left would create an extra charge on the trustees.
  • Settlor interested version of any of these: the trustees pay at the rate for the underlying type, and the settlor is taxed on the £6,000 with credit for that tax.

What mistakes come up most often?

  • Treating a bare trust as a discretionary trust and filing a trust return at 45% when the income belongs to the beneficiary. See bare trusts: tax treatment.
  • Assuming every interest in possession trust escapes the ten yearly charge. Lifetime interests created on or after 22 March 2006 are usually relevant property.
  • Claiming hold over relief on a gift into a trust the settlor or their spouse can benefit from.
  • Treating the £500 tax free amount as an allowance. If income goes over it, the whole amount is taxed.
  • Forgetting that most express trusts must be registered on the Trust Registration Service even when no tax is due.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.