What makes a trust taxable? A refresher for the new tax year

Trusts are a valuable tool for protecting assets and planning for future generations. However, they come with important tax obligations that must be carefully managed so as to avoid unexpected liabilities and penalties.

With the new tax year starting on 6 April 2026, now is a good opportunity for trustees and settlors to review how trust are taxed.

The main types of tax payable by a trust are:

-       Inheritance tax (IHT)

-       Income tax

-       Capital gains tax (CGT)

Inheritance Tax (IHT)

IHT is one of the important taxes to consider when dealing with trusts. Whilst IHT is usually associated with an individual’s estate on death, it can also apply during the lifetime of a trust.

There are key situations when IHT may arise for a trust, including:

-       When assets are transferred into a trust

-       On every 10-year anniversary of the trust’s creation

-       When assets are distributed out of trust (known as exit charges)

However, like all taxes, special rules and exceptions may apply depending on the type of trust or trust assets. For example, Bare Trusts are generally not subject to IHT provided the Settlor survives seven years after transferring assets into trust.

IHT is reported to HMRC using the IHT100 form, which can be found on the government website. Due to the complexity of calculations and reporting involved, many trustees often instruct accountants to deal with this on their behalf.  

Income Tax

Trusts may also be liable for income tax, depending on the income it generates. It is therefore important that this is not overlooked.

Most trusts benefit from a £500 tax-free allowance. However:

-       This allowance is shared across all trusts created by the same Settlor.

-       If a Settlor creates five or more trusts, the allowance the tax-free allowance is capped at £100 per trust.

-       Some trust types are not entitled to any tax-free allowance.

A few common examples of when income tax may be payable include:  

-       Rental income from property held in trust.

-       Dividends paid from shares and investments held in trust.

-       Interest earned on a trust bank account.

Trustees must report trust income using the Self-Assessment: Trust and Estate Tax Return (SA900) form. This can be completed by trustees themselves or by a professional adviser such as an accountant.

Capital Gains Tax (CGT)

CGT is a tax on the profit (‘gain’) when disposing of or selling an asset that has increased in value.

When assets are transferred into a trust CGT may be payable by the Settlor.

When assets are disposed of or transferred out of the trust, CGT may be payable by the trustees or, in some cases, by the beneficiaries.

The applicable CGT allowances and reliefs depend on the trust type.

For example:

-       Certain costs, like professional fees can be deducted.

-       Bare Trusts generally do not trigger a CGT liability when assets are appointed to beneficiaries.

CGT must usually be reported to HMRC within:

-       60 days of completion for property disposals after 27 October 2021; or

-       30 days of completion for property disposals between 6 April 2020 and 26 October 2021.

Trustee Responsibilities

Trustees have legal duties to ensure the trust is administered correctly and that all HMRC reporting and tax obligations are met within the relevant deadlines.

 HMRC are not forgiving and imposes interest and penalties on late or incorrect reporting, even where the trustees’ oversight was unintentional.

If trustees cannot fulfil their duties, due to capacity, constraints or location, it may be appropriate to appoint replacement trustees. WT Solicitors can assist trustees to ensure that this is done correctly.

In summary

Accurate reporting and timely payment of trust taxes are very important. Even small amounts of unpaid tax can quickly increase due to penalties and interest levied by HMRC.

Key upcoming deadlines for income tax reporting:

-       31 October 2026 (paper returns)

-       31 January 2027 (online returns)

Whilst WT Solicitors are not tax specialists, we regularly work alongside a number of trusted accountancy firms and can help provide referrals where needed. If you would like advice on trust administration, trustee responsibilities, or appointing new trustees, please get in touch with our team.