Could someone explain the taxation of non-discretionary trusts in the UK?

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Could someone explain the taxation of non-discretionary trusts in the UK?


A trust is a legally binding agreement through which a trustee manages a property or assets on behalf of the owner for the benefit of a third party- beneficiary. There are several items that can put in trust, including land, shares, money, jewelry, buildings, furniture, and paintings. Ideally, the owner of the assets dictates what the trustee can do with them as well as whom the beneficiaries are.

However, it is important to understand that trustees’ roles go beyond implementing the settlor’s wishes. They deal with investing, day-to-day management, and tax aspects of the trust. The two main types of trusts are:

  • Discretionary

If you are a beneficiary of a discretionary trust then you have no control over the assets or their distribution. The assigned trustee has full decision-making powers regarding how the fund is managed and distributed. A discretionary set up is mostly applicable in a situation where the beneficiary has special disabilities. It is also used when the assets are primarily meant for future use or when the beneficiaries aren’t responsible enough manage their finances.

  • Non-discretionary trusts

A non-discretionary trust, on the other hand, gives one or more of the beneficiaries a partial control when it comes to distribution of the trust funds or assets. Unlike in discretionary setup, the trustee doesn’t have full control over how the assets under management should be distributed. In many instances, he/she is simply required to distribute the money or assets as outlined by the settlor.

Generally, beneficiaries are required to pay tax on the distributions that come from a trust’s income. They are however not subject to taxation on whatever they receive from the principal. If either of the beneficiaries is entitled to income from the trust, he/she is subject to paying tax. Trustees are required by HMRC to report and pay various taxes on behalf of the trust.

According to HMRC, trust beneficiaries may be required to remit tax through Self Assessment depending on the type of trust. They can equally be eligible for tax refund. If you are a beneficiary of a bare trust then you must declare and pay tax on all of its income. You can simply do this by registering for Self Assessment and filling your returns online.

Beneficiaries of interest in possession trusts don’t have to pay taxes since the trustee does so before passing the income to you. However, you are subject to taxation when the income you get from the trust takes your annual earning to a higher Income Tax Band rate. You will need to cater for the deficit if you are a higher rate taxpayer.

benefits of using trust brand

Benefits Of Using A Trust Fund To Pass On Wealth

Trusts have continued to be of great benefits to many. While every concept comes with shortcomings, the advantages of using a trust outweigh the cons. Putting your wealth to a trust enables you to:

  • Provide guidance on when and how your money or assets are to be distributed
  • Cut-down on the gift and estate taxes
  • Efficiently distribute your wealth to heirs at minimal cost and without the publicity of probate or delay
  • Secure your wealth from creditors and possible lawsuits
  • Have a trustee who is responsible for managing your properties today and in future

Are you looking for expert advice before putting your money or properties into a trust? Contact weaccountax professional accountants near you. Our knowledgeable team will be happy to guide through available options before you can eventually settle on one. In addition to expert financial advice, we provide online accounting, taxation, and bookkeeping services. Choose us whenever you are considering cheap accounting best brand alternative for your small business.

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