Discretionary trusts ― income tax

Produced by Tolley

The following Trusts and Inheritance Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

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

Discretionary trusts ― income tax


This guidance note explains how to calculate the income tax liability on the income of discretionary trusts and any trusts where income may be accumulated. It also covers the general principles of income tax that apply to all trusts and identifies the features specific to discretionary and accumulation trusts.

Trustees are together treated as if they were a single person (distinct from the individuals who are the trustees of the trust from time to time).

In order to calculate the income tax liability for any trust, you first have to determine what type of trust it is. It is essential when dealing with a trust for the first time to read the trust instrument. As explained in the Taxation of trusts – introduction guidance note, the income tax treatment will fall into one of the two categories:

  1. standard rate tax (bare trusts and all interests in possession)

  2. trust rate tax (discretionary and accumulation trusts)

The nature of an interest in possession and the income tax treatment is detailed in the Interest in possession trusts – income tax guidance note. In the hands of the trustees, the income is taxed at basic and dividend rates, but it is ultimately charged on the beneficiary at his personal rates, regardless of when and whether the income is paid over to him.

Additional rates of tax apply to trustees’ accumulated or discretionary income. This is defined as income which either:

  1. must be accumulated (because of a direction in the trust instrument or under the general law)

  2. is distributable at the discretion of the trustees or any other person

The latter category includes cases where there is discretion over whether, or the extent to which, the income is to be accumulated, as well as discretion over the persons to whom the income is to be paid, and how much of the income is to be paid to any person.

As a result of the discretionary power, the income of

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