This article identifies the tax position of trustees and beneficiaries in receipt of dividend income and savings income generated from trust assets. It does not consider all scenarios and Quilter recommends that independent tax advice be sought in all cases.
Savings and dividend income
A trust will generally receive income in the form of savings and dividend income. Trustees of discretionary trusts are charged income tax at the special trust rates, after deduction of trust expenses. The dividend trust rate for the 2023/24 tax year is 39.35% for dividend income and the rate applicable to trusts (RAT) is 45% in respect of other income, such as interest.
The 45% income tax rate was introduced for individuals whose income originally exceeded £150,000 but was reduced this year to £125,140 and the personal allowance is reduced where income exceeds £100,000. Although not directly related to trusts, trustees and especially beneficiaries in receipt of trust income will need to take this into account.
Those individuals who are liable to tax at the 45% rate are known as additional rate taxpayers.
The first £1,000 of taxable trust income, which would otherwise be chargeable at the RAT or the dividend trust rate, is instead chargeable at the basic rate, or dividend ordinary rate, depending on the nature of the income. This part of income is known as the standard rate band.
If a settlor of a trust has made more than one settlement, the standard rate band is reduced by dividing the £1,000 by the total number of settlements made and still in existence. The amount cannot be reduced below £200. So, if a settlor has made two settlements each will be entitled to £500. If a settlor has made five or more, each will be entitled to a minimum of £200.
Trustees may choose to distribute savings or dividend income to beneficiaries, or to reinvest in the trust. Where the trust investment is a collective (UK authorised investment fund (AIF)), an income tax liability will arise irrespective of whether the units held are accumulation or income units.
Taxation of savings income in excess of the standard-rate band in the hands of trustees
The following examples assume that the standard rate slice of income has already been used.
Savings income (issued from an AIF or deposit taker, i.e., interest) is paid gross. Therefore, the trustees are liable for tax at 45% as shown below. The tax would be paid via the trustees self-assessment return.
| Example | |
| Interest received by trustees | £1,000 |
| RAT at 45% | £450 |
| Amount available for distribution | £550 |
Taxation in the hands of beneficiaries
When the trustees choose to pay income to the beneficiary, the amount they receive from the trust is grossed up by the trust rate of 45%. In this example, the trustees distribute £550 to the beneficiary who is deemed to have received £550 / 0.55 = £1,000. This payment is treated as having a tax credit of £450 (45%). The beneficiary may be able to reclaim some or all the tax this tax credit, depending on their personal circumstances. It’s worth noting that the beneficiary is treated as having received ‘trust income’ rather than savings income and so cannot use the personal savings allowances.
| Type of taxpayer | Total received after credit reclaim |
| Additional rate taxpayer | £550 (no reclaim available) |
| Higher rate taxpayer | £600 (£550 received and able to reclaim £50) |
| Basic rate taxpayer | £800 (£550 received and able to reclaim £250) |
| Non-taxpayer | £1,000 (£550 received and able to reclaim £450) |
Taxation of dividend income in excess of the standard-rate band, in the hands of the trustees
The dividend trust rate is 39.35%. The following example demonstrates how the dividend received will be liable to tax.
| Example | |
| Dividend received by trustees | £800.00 |
| RAT at 39.35% | £314.80 |
| Amount available to trust | £485.20 |
If the Trustees accumulate the income then the £485.20 is rolled up within the trust.
If they exercise their discretion and pay all the income to one or more of the beneficiaries, the taxation is different.
Taxation of dividend income in the hands of the beneficiaries
As with savings income, any dividends distributed to the beneficiaries is deemed to be ‘trust income’. The beneficiary cannot use their dividend allowance and the dividend rate is not applicable to the beneficiary. Any income received by the beneficiary is grossed up and comes with a tax credit of 45%.
In this example, if the trustees distributed £485.20 to the beneficiaries this would be treated as receiving grossed up trust income of £882.18 (£485.20 / 0.55) with a tax credit of £396.98 (45%) which may be reclaimed.
| Type of taxpayer | Total received after credit reclaim |
| Additional rate taxpayer taxed at 45% |
£485.20 (no reclaim due) |
| Higher rate taxpayer taxed at 40% | £529.30(£485.20 received from trust and a reclaim of £44.10) |
| Basic rate taxpayer | £705.74 (£485.20received from trust and reclaim of £220.54) |
| Non-taxpayer | £882.18 (£485.20received from trust and reclaim of £396.98) |
In this dividend example, the trustees have paid £314.80 tax at the dividend trust rate. However, a beneficiary which is a non-taxpayer can reclaim £396.98. This leaves a deficit of £82.18 which the trustees must pay to HMRC from the trust fund via a Trust and Estate Tax Return (SA900).
If income is accumulated, the net distribution after deduction of any additional tax will roll up within the trust. This will then become additional capital of the trust which, if distributed to beneficiaries as capital at a later date, will not be subject to income tax but may be subject to inheritance tax charges.
Last updated: September 2023