Interest in possession 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:

  • Interest in possession trusts ― income tax
  • Introduction
  • The calculation of taxable income
  • Deductions from taxable income
  • Rates of tax
  • The calculation of income tax
  • Tax deducted at source

Interest in possession trusts ― income tax


This guidance note explains how to calculate the income tax liability on the income of an interest in possession trust. It also covers the general principles of income tax that apply to all trusts and identifies the features specific to an interest in possession trust.

Trustees together are 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 two categories:

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

  2. trust rate tax (discretionary and accumulation trusts)

The nature of a discretionary interest and the income tax treatment is detailed in the Discretionary trusts ― income tax guidance note. Higher trust rates of tax apply to trustees’ accumulated or discretionary income.

The income tax treatment of bare trusts is described in the Bare trusts ― income tax and CGT guidance note.

An interest in possession is characterised by a beneficiary’s right to the income of a trust as it arises. The income belongs to the beneficiary, and the trustees have no authority to withhold it except to use it for legitimate expenses. The entitlement is usually expressed in the trust instrument in such terms as:

“The Trustees shall stand possessed of the Trust Fund and the income of it upon trust to pay such income to the Beneficiary during his life”

The term ‘interest in possession’ is not defined for the purpose of income tax. It is rather a default position. The income of trustees is not income of an individual. If the trust income does not fall within the definition

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