Income arising in a settlor-interested trust is treated for income tax as the settlor’s own income during their lifetime, whether or not any of it actually reaches them. Under Section 624 of the Income Tax (Trading and Other Income) Act 2005, the whole of that income is charged to tax on the settlor at their marginal rates, which for 2025/26 can run up to 45%, with credit given for tax the trustees have already paid at the trust rate.1Legislation.gov.uk. Income Tax (Trading and Other Income) Act 2005 – Section 624 The same treatment extends to trusts that can benefit the settlor’s spouse, civil partner, or unmarried minor children.
When a Trust Counts as Settlor-Interested
A trust is settlor-interested when the person who created it, their spouse, or their civil partner could benefit from the trust property or its income. Section 625 sets the bar deliberately low: the settlor is treated as retaining an interest if the property or income could be paid to them or applied for their benefit “in any circumstances whatsoever.”2HM Revenue & Customs. Trusts, Settlements and Estates Manual – TSEM4200 – Settlements Legislation: Settlor Retains an Interest Nothing has to have actually been paid. A discretionary clause allowing trustees to distribute back to the settlor is enough on its own.
That breadth catches arrangements people often assume are safe. A power for trustees to add beneficiaries, where the settlor or their spouse could theoretically be added, is enough. So is a reversion to the settlor on the failure of other interests, or a wind-up clause returning surplus funds to the creator. What matters is what the deed permits, not what the trustees intend in practice.
The rules also treat a trust as settlor-interested where property may be paid to or applied for the benefit of the settlor’s unmarried minor child.1Legislation.gov.uk. Income Tax (Trading and Other Income) Act 2005 – Section 624 “Minor” means under 18, and “child” includes stepchildren.
How the Income Is Taxed on the Settlor
Every pound of income the trust generates in a tax year is treated as the settlor’s personal income for that year. Attribution happens whether the trustees accumulate the income, distribute it to a third-party beneficiary, or send it overseas. Rental income paid to a beneficiary in Australia still lands on the settlor’s tax return in Birmingham.1Legislation.gov.uk. Income Tax (Trading and Other Income) Act 2005 – Section 624
The settlor pays income tax at their own marginal rates. For 2025/26, the England, Wales, and Northern Ireland bands are 20% on taxable income from £12,571 to £50,270, 40% from £50,271 to £125,140, and 45% above £125,140.3GOV.UK. Income Tax Rates and Personal Allowances Trust income stacks on top of everything else the settlor earns. Someone on a £90,000 salary who also has £40,000 of trust income attributed to them crosses the higher-rate threshold and enters additional-rate territory on part of the trust income.
The personal allowance adds a further cost. It stands at £12,570 for 2025/26 but tapers by £1 for every £2 of adjusted net income above £100,000, disappearing entirely at £125,140.3GOV.UK. Income Tax Rates and Personal Allowances Attributed trust income counts toward that threshold. A settlor whose own earnings sit safely below £100,000 can lose part or all of their allowance once trust income is added, producing an effective marginal rate above 60% on the income falling in the taper band.
Credit for Tax the Trustees Paid
Trustees pay tax on trust income before it is attributed. For accumulation and discretionary trusts in 2025/26 the trust rate is 45% on non-dividend income and 39.35% on dividends. Interest in possession trusts pay 20% on non-dividend income and 10.75% on dividends.4GOV.UK. Trusts and Income Tax The settlor reports the gross figure and takes credit for whatever the trustees have paid, so the same income is not taxed twice. Where the settlor’s marginal rate exceeds the trust rate, they owe the balance. The mismatch bites hardest with interest in possession trusts, where the trust pays only 20% but the settlor may be sitting at 40% or 45%.
Income Reaching a Minor Child
Section 629 sets a separate rule for income paid to or for the benefit of the settlor’s unmarried minor child. Any such income is taxed on the settlor rather than the child, and this rule operates independently of the general settlor-interested rules, catching some trusts that would not otherwise qualify.5Legislation.gov.uk. Income Tax (Trading and Other Income) Act 2005 – Section 629
There is a £100 de minimis. If total income to or treated as the child’s from a particular settlement is £100 or less in the tax year, it stays taxed on the child.5Legislation.gov.uk. Income Tax (Trading and Other Income) Act 2005 – Section 629 Once the figure crosses £100, the whole amount is attributed to the settlor, not just the excess. A distribution of £101 produces the same attribution mechanism as one of £10,000. The rule falls away once the child turns 18 or marries.
Exceptions
Not every arrangement that could theoretically benefit the settlor triggers attribution. An outright gift from one spouse or civil partner to the other is outside the settlement rules provided the gift carries a right to the whole of the income, is not wholly or substantially a right to income, and is unconditional, with no circumstances under which the property could revert.6GOV.UK. Trusts, Settlements and Estates Manual – TSEM4205 – Outright Gifts Between Spouses or Civil Partners A straightforward gift of shares passes. A gift where the donor keeps the dividends, or where the shares revert on divorce, does not.
Income applied for charitable purposes can be excluded in certain circumstances, and HMRC’s manual sets out other statutory carve-outs at TSEM4206 and TSEM4207. The deed has to establish clearly that an exception applies; trustees cannot assert one after the fact.
Capital Gains Are Attributed Too
The attribution rules go beyond income. Under Section 77 of the Taxation of Chargeable Gains Act 1992, capital gains realised by trustees of a settlor-interested trust are treated as accruing to the settlor in the same tax year as the disposal.7HM Revenue & Customs. Capital Gains Manual – CG38435 – Overview of TCGA92/S86 The settlor’s own annual exempt amount and personal CGT rates apply. A trustee sale of appreciated investments can therefore create an immediate CGT charge on the settlor, who may have had no say in the timing.
What Ends at the Settlor’s Death
Section 624 attributes only income arising “during the life of the settlor.”1Legislation.gov.uk. Income Tax (Trading and Other Income) Act 2005 – Section 624 After the settlor dies the trust reverts to ordinary trust taxation: trustees pay at the applicable trust rate and beneficiaries are taxed on distributions according to their own circumstances. For trusts set up primarily for succession, the settlor-interested period is an interim cost that ends with the settlor.
Filing the Income on Your Return
Two documents drive the settlor’s filing. The trust deed confirms the nature of the interest, and Form R185, the Certificate of Deduction of Income Tax, sets out the gross income the trust generated and the tax the trustees have already paid.8GOV.UK. Trusts and Estates: Certificate of Deduction of Income Tax (R185) Without the R185, you cannot compute the extra tax you owe or the credit available.
The trust income is reported on the SA107 supplementary pages filed with the SA100 Self Assessment return.9GOV.UK. Self Assessment: Trusts etc (SA107) The gross income and deducted tax come straight from the R185. For 2024/25, the paper filing deadline is 31 October 2025 and the online deadline is 31 January 2026, with an automatic £100 penalty for late filing and further penalties at three, six, and twelve months.10GOV.UK. Self Assessment Tax Returns: Deadlines Chase the R185 well before the deadline; leaving it to January is how late filings happen.
Recovering the Tax From the Trustees
Because the settlor pays personal tax on income generated by assets they no longer own, Section 646 gives them a statutory right to recover that tax from the trustees.11Legislation.gov.uk. Income Tax (Trading and Other Income) Act 2005 – Adjustments Between Settlor and Trustees The settlor asks HMRC for a certificate confirming the tax year, the amount of income attributed, and the tax paid on it. The certificate is conclusive evidence of those figures. The settlor presents it to the trustees, who reimburse them from trust assets.12GOV.UK. Trusts, Settlements and Estates Manual – TSEM4553 – Certificate Under Section 646(6A) ITTOIA
Trustees should hold funds back to cover the reimbursement. Where trust assets are illiquid, the payment can be slow, and the settlor may be out of pocket for months on tax they never economically owed.