Trust Taxation & 10-Year Charge Calculator (2026/27)

How UK Trust Taxation Works in 2026/27

Trusts in the United Kingdom operate under distinct statutory tax regimes governed primarily by the Income Tax Act 2007 (ITA 2007), the Inheritance Tax Act 1984 (IHTA 1984), and significant modernization measures enacted under the Finance Act 2024.

Unlike individuals, discretionary trusts do not benefit from a personal allowance or dividend allowance. Instead, income is taxed at the highest statutory rates to prevent wealthy individuals from using trusts to shelter income from personal taxation.

UK Trust Rates by Classification (2026/27)

The Finance Act 2024 £500 De Minimis Exemption

From 6 April 2024, Section 23 of the Finance Act 2024 abolished the old £1,000 standard rate band and established a statutory £500 de minimis threshold:

• Below or Equal to £500:If the trust's total taxable income does not exceed £500, no Income Tax is due from the trustees. Trustees are not required to submit an SA900 trust return for this income.
• Exceeding £500: If total income is £501 or more, the entire income is chargeable at trust rates (45% or 39.35%). The £500 does not function as a nil-rate band.
• Multiple Trusts Rule: Where a settlor has created more than one active settlement, the £500 de minimis is divided equally among the active trusts, subject to a statutory minimum floor of £100 per trust.

Beneficiary Distributions & Form R185 Tax Credits

When discretionary trustees distribute income to a beneficiary, the payment is treated as having suffered 45% Income Tax. For example, a £5,500 net distribution represents £10,000 of gross trust income carrying a £4,500 non-repayable tax credit.

Trustees provide the beneficiary with HMRC Form R185 (Trust Income). If the beneficiary is a non-taxpayer or basic-rate taxpayer, they can submit an SA100 or Form R40 repayment claim to HMRC, recovering up to 45% of the gross income as a cash refund!

The 10-Year Anniversary Inheritance Tax (IHT) Charge

Discretionary trusts are categorized as relevant property under the Inheritance Tax Act 1984. Every 10 years from the date the trust was created, the trustees must value all trust assets and calculate the 10-year periodic charge:

• Assets up to the available Nil-Rate Band (£325,000) are exempt.
• The available nil-rate band is reduced by chargeable transfers made by the settlor in the 7 years before creating the trust.
• The statutory maximum periodic charge is 6.0% (calculated as 30% of the 20% lifetime IHT rate).
• Exit charges (Section 68 IHTA 1984) apply when capital is distributed between 10-year milestones, calculated in 40ths based on completed calendar quarters.