Taxation of trusts—settlor interested trusts
Taxation of trusts—settlor interested trusts

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

  • Taxation of trusts—settlor interested trusts
  • Income tax—settlor interested trusts
  • Capital gains tax—settlor interested trusts
  • Inheritance tax—settlor interested trusts

The rules relating to settlor interested trusts are anti-avoidance rules, aimed at ensuring that a settlor cannot avoid tax on assets of which they are not fully divested. This Practice Note focuses principally on the income tax treatment of settlor interested trusts, although the capital gains tax (CGT) and inheritance tax (IHT) consequences are also outlined.

For an at-a-glance summary of the tax treatment of settlor interested trusts, see the table in Practice Note: Taxation of trusts—summary of tax treatment of settlor interested trusts.

Income tax—settlor interested trusts

The general rule relating to income that may be treated as the settlor’s own income is contained in section 624 of Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), which is part of what HMRC refers to as the ‘settlements legislation’ (and is also known as the ‘settlements code’ or ‘settlor code’).

The general rule is subject to certain exceptions (see ‘Exceptions to the general rule’ below).

While the general rule is often applied in the context of settlor interested trusts, the legislation is widely drafted and the general rule may therefore apply to other arrangements which are not formal or express trusts. This is discussed in more detail below (in ‘Arrangements to which the general rule applies’ below).

The general rule in ITTOIA 2005, s 624—income attributed to settlor

The general rule states