How are trust income distributions taxed for beneficiaries?
Answered 17 March 2026
Taxation of Trust Income Distributions for Beneficiaries
The tax treatment depends on the type of trust from which the distribution is made. There are three main categories:
HMRC Guidance / Practice
1. Bare Trusts
Where a bare trust exists, the beneficiary has an absolute and immediate right to trust capital and income as it arises. The beneficiary shows the gross trust income on their personal tax return. The trustees are not required to make a tax return; it is the beneficiary who is strictly chargeable to tax, though trustees may pay tax on their behalf.
The beneficiary must not deduct expenses paid by the bare trustees, because the income used to pay those expenses is income that belongs to the beneficiary.
2. Interest in Possession (IIP) Trusts
In an IIP trust, the trustees must pass on all trust income to the beneficiary as it arises (less any expenses), or the beneficiary has a right to use the trust property.
The trustees are initially taxable on the trust income because they receive it. But the IIP beneficiary is ultimately taxable on the trust income because they are entitled to it — tax is charged on the beneficiary on the "entitled" basis, with credit given for any tax paid by the trustees.
The beneficiary's entitlement is measured by the net income after trust management expenses (TMEs) properly chargeable to income — TMEs do not constitute a tax deduction or relief, but rather reduce the measure of income to which the beneficiary is entitled in the first place.
Trust income retains its character in the hands of an IIP beneficiary (e.g. foreign income remains foreign income).
3. Discretionary / Accumulation Trusts
Income distributed to a beneficiary by UK resident trustees of a discretionary trust is treated as an amount from which tax at the special trust rate has been deducted at 45% (from 2016-17) under ITA/S493. This amount is treated as a repayable credit in the hands of the beneficiary.
The beneficiary is taxed on the payments at their marginal rate, with credit given for the tax treated as deducted. If the beneficiary's marginal rate is lower than 45%, they may be entitled to a repayment.
The income distributions count towards the beneficiary's total taxable income.
In settlor-interested trusts (from 2006-07 onwards), where the settlor is taxed on the trust income as it arises, discretionary payments to other beneficiaries carry a credit at the additional rate. The credit is ring-fenced — no part of it can be repaid or set against liability from any other income of the beneficiary.
Under ESC B18, a discretionary beneficiary may "look through" to the underlying sources of trust income and claim reliefs or exemptions as if they received the income directly, with credit for tax paid by the trustees on those specific sources.
Summary Table
| Trust Type | Beneficiary Taxed On | Credit Available |
|---|---|---|
| Bare trust | Gross income as it arises | Any tax paid by trustees |
| IIP trust | Net income as it arises (entitled basis) | Tax paid by trustees at basic/other rates |
| Discretionary trust | Distributions received (marginal rate) | 45% credit under ITA/S493 |
Citation sources
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