Wealth Planning

Settlor-Interested Trust


How settlor-interested trusts work

If any of the following people benefit from income or gains from a trust, it is regarded as settlor-interested:

  • the settlor
  • the settlor’s spouse or civil partner

There are additional rules for trusts that are not settlor-interested but from which a relevant child of the settlor may benefit.

Settlor-interested trusts aren’t a type of trust in their own right – they will be one of the following types of trust:

  • interest in possession trusts – where the settlor, the settlor’s spouse or civil partner may be entitled to all the income
  • accumulation trusts – where trustees can retain and accumulate income on behalf of the settlor, the settlor’s spouse or civil partner
  • discretionary trusts – where trustees can make payments to the settlor, their spouse or civil partner

Example of a settlor-interested discretionary trust

Dave Green has an illness and can no longer work. He decides to set up the Dave Green Discretionary Trust to ensure he has money in the future. He places some of his money in the trust. This makes him the settlor, but he also benefits from the trust, so he ‘retains an interest’. This is because the trustees can make payments to him. As a result, Dave can be taxed on income received by the trustees – more on this below.

If instead Dave’s parents provide the money for the trust, they are the settlors. Dave is not a settlor, therefore the trust is not regarded as settlor-interested.

Settlor-interested trusts and Income Tax

With settlor-interested trusts, the settlor is liable for all Income Tax due on income received by the trustees, even income that is not paid out to the settlor. However, the trustees are required to pay the tax, as the recipients of the income.

The Income Tax rate applied depends on how the trust has been set up. If it operates as an accumulation or discretionary trust, the rate for that type of trust applies. If it operates as an interest in possession trust, the rate for that type of trust applies.

Partly settlor-interested trusts

Settlor-interested trusts can also be partly settlor-interested. Trustees can hold distinct funds within the trust, some of which the settlor (and spouse or civil partner) are excluded from. With partly settlor-interested trusts, the settlor pays tax only on the income arising from the part of the trust from which they, their spouse or civil partner may benefit.

How the settlor reports and pays Income Tax

Although the settlor is liable for all the tax due on income from a settlor-interested trust (or the settlor-interested element of a partly settlor-interested trust), the trustees must still complete a Trust and Estate Tax Return and pay tax on all of the income they receive from the trust.

Each year, the settlor must then enter on their personal tax return details of the Income Tax the trustees have paid on their behalf. They do this using form SA107 Trusts etc – the trusts supplementary pages of the main SA100 Tax Return form.

The settlor can set the amount paid by the trustee on their behalf against the amount of tax they have to pay and (depending on their overall level of taxable income) may qualify for a refund or have to pay more tax.

Settlor-interested trusts and Capital Gains Tax

Capital Gains Tax is a tax payable on ‘gains’ (profits) made from the sale or transfer of assets such as shares, property or possessions.

For the tax year 2007-08 and earlier, settlors pay Capital Gains Tax on any chargeable gains made by the trustees. These gains are added to the settlor’s personal gains.

For the tax year 2008-09 and beyond, the trustees pay Capital Gains Tax on any chargeable gains they make above an amount called the ‘annual exempt amount’.

Settlor-interested trusts and Inheritance Tax

There may be an Inheritance Tax charge when:

  • assets (money or property) are put into a trust
  • a trust reaches a ten-year anniversary
  • assets are distributed from a trust
  • the settlor dies

Settlor-interested trusts may fall be clarified as ‘relevant property’ trusts, which have to pay Inheritance Tax on anything above the Inheritance Tax threshold of £325,000.

If you would like to discuss the above please email us, or go back to our other contact details.

Our Wealth Planning Team

Michael Culver
I am a Partner and head of the Wealth and Estate Planning team at Bolt Burdon. Read More
T: 020 7288 4713
Helen Beach
I am a Partner in the Wealth and Estate Planning Team. Read More
T: 020 7288 4783
John Nettleship
I am a Senior Solicitor in the Wealth & Estate Planning Team Read More
T: 020 7288 4788
Tanya Lloyd
I am an Associate in the Wealth and Estate Planning Team. Read More
T: 020 7288 4771
Pamela Jarvis
I am a Senior Paralegal in the Wealth and Estate Planning team, and I work primarily in our Court of Protection team, assisting elderly and vulnerable clients. Read More
T: 0207 288 4764
Sam Hoskins
I’m a paralegal within the Wealth and Estate planning team. Read More
Vaishali Kapadia
I am a Senior Solicitor in our Wealth and Estate Planning Team. Read More
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