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HMRC internal manual

Trusts, Settlements and Estates Manual

HM Revenue & Customs
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Trust income and gains: beneficiaries: beneficiary entitled to trust income - overview

An ‘interest in possession’ (IIP) beneficiary may be entitled to the whole or a share of the trust income. If a share, normally the beneficiary is entitled to a share of each item of trust income. Occasionally a beneficiary receives income from an earmarked fund, due to a specific provision in the trust document, or a legally binding agreement between the trustees and all interested parties.

In a trust with an IIP beneficiary, the taxation of the trustees and the beneficiary follows normal principles. The person liable for income tax is the person receiving or entitled to the income. The relevant legislation is in ITTOIA, at S8 for trading income, S271 for property business income, S371 for interest. S385 for dividends and other distributions, and S581 for royalties.

The trustees may initially be taxable on the trust income because they receive the income. They may also have income that is taxed at source. They may have to make a return on the Trust and Estate tax return (but see TSEM3763).

The IIP beneficiary is taxable on the trust income because he or she is entitled to it.

The IIP beneficiary may receive the income from the trustees net of tax. To arrive at the correct measure of income, the net income is grossed up. See TSEM3764.

If the trustees are taxed, the IIP beneficiary is given credit for any tax already paid by the trustees. See TSEM3765.

A simple example of the taxation of IIP trustees and beneficiary is at TSEM3766.

The trustees usually give the IIP beneficiary a statement of trust income so that the beneficiary can make a return or claim repayment. They usually use form R185 (Trust Income). See TSEM3767.

Settlements legislation

Different rules apply where the income of the IIP beneficiary is treated as that of the settlor under the settlements legislation. Examples of this are where the IIP beneficiary is a spouse, civil partner or minor child of the settlor. See TSEM4200, TSEM4300 and TSEM4512.