Settlor-interested trusts – calculations and compliance

By Tolley

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

  • Settlor-interested trusts – calculations and compliance
  • General principles
  • The charge on income where the settlor retains an interest
  • The charge on income paid to children of the settlor
  • The income tax charge on capital payments to the settlor

This guidance note describes how the income of a settlor-interested trust is charged on the settlor in accordance with the provisions of the Settlements Code set out in ITTOIA 2005, Part 5, Chapter 5. See the Settlor interested trusts guidance note. The three categories of charge are:

  • on income arising under a settlement during the life of the settlor, from property in which the settlor has retained an interest (ITTOIA 2005, s 624)
  • on settlement income paid to relevant (ie unmarried minor) children of the settlor, during the life of the settlor (ITTOIA 2005, s 629)
  • on capital paid to the settlor by the trustees of a settlement (to the extent that it can be matched with undistributed income) (ITTOIA 2005, ss 633, 641)
General principles

Under all three heads of charge, income tax is charged on a formal trust in the usual way, according to the type of income, at either standard rates or trust rates depending on the type of trust.

ITTOIA 2005, s 646(8)

See the following guidance notes:

  • Interest in possession trusts – income tax
  • Discretionary trusts – income tax

Note however, that tax charged does not always enter a ‘tax pool’. See the different scenarios outlined below.

The trustees must submit a trust and estate tax return SA900  giving full details of the trust income. The fact that the trust / settlor will be subject to one of the charges under the settlements code is indicated on the tax return as described below.

The trustees must provide the settlor with details of the income to be charged and he declares it

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