Settlor-interested trusts ― calculations and compliance

Produced by Tolley
Settlor-interested trusts ― calculations and compliance

The following Trusts and Inheritance Tax guidance note Produced 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 settlor is the beneficiary ― interest in possession and bare trust arrangements
  • The settlor is not the beneficiary ― interest in possession
  • The settlor is the beneficiary ― discretionary trust
  • The settlor is not the beneficiary ― discretionary trust
  • The charge on income paid to children of the settlor
  • IIP trusts and bare trusts
  • Discretionary and accumulation trusts
  • More...

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:

  1. on income arising under a settlement during the life of the settlor, from property in which the settlor has retained an interest

  2. on settlement income paid to relevant (ie unmarried minor) children of the settlor, during the life of the settlor

  3. on capital paid to the settlor by the trustees of a settlement (to the extent that it can be matched with undistributed income)

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.

See the following guidance notes:

  1. Interest in possession trusts ― income tax

  2. 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 on his personal tax return.

The settlor’s liability is calculated as if the amount charged formed the highest part of his total income. The settlor is allowed the same reliefs and deductions as if the amount treated as his income had actually been received by him.

Various provisions in the Taxes Acts declare that certain categories of income are to be treated as the highest part of income. Where more than one of the provisions apply, the order of priority

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