|Type of trust||Life interest||Discretionary|
|Rate on dividend income||7.5%||38.1%|
|Rate on other income||20%||45%|
|CGT rate on residential property||28%||28%|
|CGT rate on other gains||20%||20%|
|CGT annual exemption||£5,850||£5,850|
- Trustees are liable to Income Tax on the trust income, CGT on the trust gains and, in some circumstances, IHT.
- Discretionary trusts pay tax at 7.5% or 20% on income used to pay trust expenses and on another £1,000 of income, before paying at the main rates. (38.1% or 45%)
- Discretionary trusts for vulnerable beneficiaries (such as disabled people) may reduce their effective tax rates if an election is made.
- The CGT annual exemption is divided between trusts established by the same settlor since 6.6.1978, to a minimum of £1,170.
- Trustees are liable to pay IHT in a variety of circumstances; appropriate professional advice is essential.
- Beneficiaries of life interest trusts ('liferent' trusts in Scotland) are treated as entitled to the income of the trustees, and pay tax on it in the year it arises to the trust, with a credit for tax paid by the trustees.
- Beneficiaries of discretionary trusts pay tax on income distributed to them by the trustees, which is treated as paid with a tax credit of 9/11 of the cash received (i.e. a £45 tax credit for every £55 of income distributed).