Beneficiaries - paying and reclaiming tax on trusts

If you’re a trust beneficiary there are different rules depending on the type of trust. You might have to pay tax through Self Assessment or you might be entitled to a tax refund.

If you do not usually send a tax return and need to, you must register for Self Assessment by 5 October following the tax year you had the income.

Read the information on the different types of trust to understand the main differences between them. If you’re not sure what type of trust you have, ask the trustees.

Bare trusts

If you’re the beneficiary of a bare trust you are responsible for declaring and paying tax on its income. Do this on a Self Assessment tax return.

If you do not usually send a tax return and need to, you must register for Self Assessment by 5 October following the tax year you had the income.

Interest in possession trusts

If you’re the beneficiary of this type of trust, you’re entitled to its income (after expenses) as it arises.

If you ask for a statement, the trustees must tell you:

  • the different sources of income
  • how much income you’ve been given
  • how much tax has been paid on the income

You’ll usually get income sent through the trustees, but they might pass it to you directly without paying tax first. If this happens you need to include it on your Self Assessment tax return.

If you do not usually send a tax return you must register for Self Assessment by 5 October the year after you were given the income.

Example You were given income from the trust in August 2018. You need to register for Self Assessment before 5 October 2019.

If you’re a basic rate taxpayer

You will not owe any extra tax. You’ll only need to complete a Self Assessment tax return if the income you receive from an interest in possession trust takes your total annual income into the higher rate Income Tax band.

If you’re a higher rate taxpayer

You’ll have to pay extra tax on the difference between what tax the trustees have paid and what you, as a higher rate taxpayer, are liable for. This will be calculated when you do your Self Assessment.

How to reclaim tax

You can only reclaim tax as far back as the:

  • 2016 to 2017 tax year for dividends and savings income
  • 2017 to 2018 tax year for trade or property income

You can only claim the difference between your income and the dividend allowance.

Example You earned £1,500 from dividends and savings in the 2016 to 2017 tax year. The dividend allowance for that year was £5,000. You can reclaim the tax on the difference between your income and the dividend allowance for that year (£5,000 − £1,500 = £3,500).

If you’re a Self Assessment taxpayer the repayment will be calculated as part of your return.

If you’re not a Self Assessment taxpayer you can reclaim the tax using form R40.

You need to make a separate claim for each tax year.

Accumulation or discretionary trusts

With these trusts all income received by beneficiaries is treated as though it has already been taxed at 45%. If you’re an additional rate taxpayer there will be no more tax to pay.

You may be able to claim tax back on trust income you’ve received if any of the following apply:

  • you’re a non-taxpayer
  • you pay tax at the basic rate of 20%
  • you pay tax at the higher rate of 40%

You can reclaim the tax paid using form R40. If you complete a tax return, you can claim through Self Assessment.

Settlor-interested discretionary trusts

If a settlor-interested trust is a discretionary trust, payments made to the settlor’s spouse or civil partner are treated as though they’ve already been taxed at 45%. There’s no more tax to pay. However, unlike payments made from other types of trusts, the tax credit cannot be claimed back.

Non-resident trusts

This is a trust where the trustees are not resident in the UK for tax purposes. The tax rules for this type of trust are very complicated - there’s detailed guidance on non-resident trusts.

If a pension scheme pays into a trust

When a pension scheme pays a taxable lump sum into a trust after the pension holder dies, the payment is taxed at 45%.

If you’re a beneficiary and receive a payment funded by this lump sum, you’ll also be taxed.

You can claim back tax paid on the original lump sum - do this on your Self Assessment tax return if you complete one, or using form R40.

The trust will tell you the amount you need to report - this will normally be more than the amount you actually receive.