Discretionary trusts—income tax
Discretionary trusts—income tax

The following Private Client guidance note provides comprehensive and up to date legal information covering:

  • Discretionary trusts—income tax
  • The calculation of taxable income
  • Deductions from taxable income
  • Rates of tax
  • Income belonging to other persons
  • Income used to pay trust management expenses (TMEs)
  • The standard rate band
  • The calculation of income tax

FORTHCOMING CHANGE: As originally announced at Autumn Budget 2017 and followed up by written statement after Spring Statement 2018, plus an announcement in Budget 2018, the government ran a consultation on the taxation of trusts from 7 November 2018 to 28 February 2019, inviting views on the principles of transparency, fairness and simplicity that it believes should underpin the taxation of trusts. In response, in July 2019, the Office of Tax Simplification issued its second report on inheritance tax. See also the report published by the All-Party Parliamentary Group for Inheritance & Intergenerational Fairness in January 2020 recommending the adoption of a new inheritance tax regime. See also the research exploring the use of trusts which was also published on 7 November 2018. See News Analysis: Exploring the consultation and review on the taxation of trusts.

This Practice Note sets out the general principles of income tax that apply to discretionary trusts, and any trusts where income may be accumulated. The income of such trusts does not belong to any individual until it is distributed to a beneficiary at the discretion of the trustees. Consequently, while the income belongs to the trustees, it is taxed at special trust rates. If and when the income is paid out to beneficiaries, there are mechanisms to adjust the rate of tax suffered to the