How trust income is taxed
Trusts can hold a variety of assets that generate income. This might include interest from bank accounts, dividends from investments or rental income from property.
Trustees are responsible for managing this income and ensuring that any tax obligations are dealt with correctly. However, the way trust income is taxed can differ from the way income is taxed for individuals.
For trustees who are unfamiliar with the rules, understanding how trust income is taxed is an important part of administering a trust properly.
What counts as trust income?
Trust income generally refers to income generated by assets held within the trust.
Examples can include:
interest from bank or building society accounts
dividends from shares or investment funds
rental income from property
other investment income
This income is received by the trustees on behalf of the trust and must be managed according to the terms of the trust deed.
Who is responsible for the tax?
In most cases, the trustees are responsible for reporting and paying tax on trust income.
Trustees may need to submit Self Assessment tax returns for the trust, reporting income received during the tax year and calculating any tax due.
Once tax has been dealt with at the trust level, income may then be distributed to beneficiaries depending on the terms of the trust.
Different types of trusts
The way income is taxed can depend on the type of trust involved.
Some trusts distribute income to beneficiaries as it arises, while others may accumulate income within the trust.
The tax treatment can vary depending on these arrangements, and trustees should ensure they understand the structure of the trust they are administering.
Income distributions to beneficiaries
When trustees distribute income to beneficiaries, the beneficiaries may need information about the income they have received.
In some situations beneficiaries must report this income on their own tax returns.
Trustees will often provide beneficiaries with details of the income distributed so that the beneficiaries can account for the tax correctly.
Keeping clear records of income distributions is therefore an important part of administering a trust.
Rental income within trusts
Where a trust holds property that is rented out, the rental income forms part of the trust’s taxable income.
Trustees must ensure that this income is reported correctly and that any tax due is paid.
Expenses relating to the property, such as maintenance or management costs, may sometimes be taken into account when calculating the taxable income.
Trustees should maintain clear records of income and expenses relating to the property.
Investment income
Trusts often hold investment portfolios designed to generate income over time.
This may include dividends from shares or income from collective investment funds.
Trustees must ensure that this income is recorded and reported correctly in the trust’s tax returns where required.
Depending on the nature of the investments, tax may already have been deducted at source, but trustees may still need to report the income to HMRC.
Record keeping for trust income
Accurate records are essential when administering a trust.
Trustees should keep records of:
income received by the trust
tax deducted from that income
distributions made to beneficiaries
expenses incurred by the trust
Good record keeping makes it easier to complete trust tax returns and deal with any queries from HMRC.
Common issues trustees encounter
Trustees sometimes encounter difficulties when dealing with trust income.
Some common issues include:
uncertainty about how income should be reported
confusion about the tax treatment of distributions to beneficiaries
incomplete records relating to trust income
Understanding how trust income is taxed can help trustees avoid these issues and ensure that the trust is administered correctly.
Understanding wider trust tax responsibilities
Income tax is only one part of the tax framework that can apply to trusts.
Trustees may also need to consider:
Capital Gains Tax when trust assets are sold
Inheritance Tax charges that may arise during the life of the trust
reporting obligations under the Trust Registration Service
When professional advice may help
Trustees are responsible for ensuring that the trust’s tax affairs are dealt with correctly.
Advice may be helpful where:
the trust receives significant income
the trust holds property or investment portfolios
distributions are being made to beneficiaries
trustees are unsure how the rules apply
Obtaining advice can help trustees ensure that trust income is reported correctly and that tax obligations are met.
How we can help
We regularly assist trustees with the tax issues that arise during the administration of trusts.
This may include:
preparing trust tax returns
advising on the tax treatment of trust income
assisting with income distributions to beneficiaries
dealing with HMRC correspondence
If you are acting as a trustee and would like guidance on the tax position of a trust, we would be happy to discuss your situation.
