Settlor interested trusts – change in tax treatment 2010/2011 and onwards and consequences for trust accounts

9 May, 2011
by: Cripps Pemberton Greenish

One of the changes introduced by the 2010 budget is the way in which tax is treated in a settlor interested trust, which will be reflected in trust tax returns for 2010/11 now being completed.


In the past, trustees paid tax at the appropriate rate and the settlor was given the appropriate tax credit. If the level of tax paid by the trustees exceeded the personal tax due by the settlor then the settlor could obtain a tax repayment.


The Finance Act 2006 increased tax on discretionary settlor interested trusts to the usual discretionary trust rates. This meant that for 2009/10, if the settlor was a lower rate taxpayer, the settlor could reclaim up to 20% tax on savings income and up to 22.5% on dividend income.


For 2010/11 and onwards, when a settlor receives an income tax repayment as a result of tax paid by a trustee, they will now be obliged to give the refund relating to their trust interest back to the trustees.  This change does not apply to repayments of tax relating to 2009/10 or earlier years.


If a repayment is made to the trustees, this should be treated as an addition to capital in the trust accounts but is not a further settlement by the settlor. If the settlor does not make the repayment, then the amount should be treated as a capital distribution to the settlor.


The income tax rate for a higher rate taxpayer is currently 40% or 50% if earnings exceed £150,000. Bearing in mind that the income tax rate on discretionary trusts has increased to 50% on savings income and 42.5% on dividend income, this will mean that a repayment will be due to the settlor even if a higher rate taxpayer, providing the settlor’s income is less than £150,000.


Consideration should be given to this matter when preparing settlor interest trust tax returns for 2010/11.


This further complicates the administration and taxation of trusts and shows the need for this work to be handled by specialists.



Reviewed in 2015