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Income Treated as the Settlor's
If you've set up a trust or certain other financial arrangements, HMRC's anti-avoidance rules may treat the trust's income as if it's your own, meaning you'll pay tax on it even though you don't receive it directly. These rules prevent people from reducing their tax bills by d...
Introduction
If you've set up a trust or certain other financial arrangements, HMRC's anti-avoidance rules may treat the trust's income as if it's your own, meaning you'll pay tax on it even though you don't receive it directly. These rules prevent people from reducing their tax bills by diverting income to family members or trusts. This article explains when you'll be taxed as a settlor, which arrangements are caught, and how to report this income on your tax return.
What is a settlor?
A settlor is anyone who sets up a trust or settlement by providing money, property, or other assets. This includes people who create formal trusts for their family, but also extends to less obvious arrangements. You can become a settlor without realising it—for example, by giving away shares in your company whilst keeping control over the dividends they produce.
The anti-avoidance rules aim to stop settlors from avoiding tax by diverting their income to others who pay tax at lower rates.
When trust income is taxed on you as the settlor
HMRC will tax you on trust income in several specific situations. The most important rules apply when:
The settlor or their spouse/civil partner can benefit from the trust
If you create a trust and either you or your spouse (or civil partner) can receive any benefit from it, you'll be taxed on all the income the trust receives. This rule applies even if you never actually take any money out. It catches trusts where the settlor has "retained an interest"—meaning you've kept some ability to benefit from the arrangement.
This is one of the most common ways settlors are caught. If you set up a discretionary trust for your family and include yourself or your spouse as a potential beneficiary, all the trust's income becomes yours for tax purposes.
The trust benefits your unmarried minor children
If income from a trust is paid to, or for the benefit of, your own child who is:
- under 18 years old
- unmarried
then you'll be taxed on that income. This rule prevents parents from diverting their income to their children to exploit the child's personal allowance and lower tax rates.
Important exception: This rule only applies if the income from the trust exceeds £100 per tax year per child. If each child receives £100 or less in the tax year from trusts you've created, the income is taxed on the child instead.
Note that this rule only applies to your own children. Income paid to grandchildren from a trust you created is not normally caught by this provision (though other anti-avoidance rules may apply).
Discretionary trusts
A discretionary trust is one where the trustees have complete discretion over who receives income or capital and when. The beneficiaries have no automatic right to anything.
If you're the settlor of a discretionary trust and you or your spouse could benefit, all the trust's income is treated as yours. The trustees will have already paid tax on the income at the trust rate, but you must still report it and may face additional tax charges depending on your own tax position.
Interest in possession trusts
An interest in possession trust gives a named beneficiary (called a life tenant) the automatic right to receive income as it arises, although they don't own the underlying capital.
The same rules apply: if you're the settlor and you or your spouse is the life tenant with the right to the income, you'll be taxed on that income.
Dividend waivers and shares with restricted rights
You can also be caught by the settlor rules without creating a formal trust.
Dividend waivers
If you own shares in a company and formally waive (give up) your right to dividends so that other shareholders—often family members—receive more, HMRC may treat this as creating a settlement. You become the settlor, and the diverted dividends may be taxed on you rather than the person who actually received them.
This commonly happens when business owners try to shift dividends to a spouse or children to use their allowances or lower tax bands.
Shares with restricted rights
If you give or sell shares to someone but attach conditions that restrict the rights attached to those shares—for example, the shares have no voting rights or limited dividend rights—this can create a settlement for tax purposes. The income from these arrangements may be taxed on you as the settlor.
Reporting settlor income on your tax return
If any trust income is treated as yours under these rules, you must report it on your Self Assessment tax return in the "Trusts etc" section.
You'll need to show:
- The amount of income treated as yours
- Any tax already paid by the trustees
- Details of the trust or settlement
The trust or the trustees should provide you with the information you need. If the trustees have already paid tax on the income (which they will have done if it's a discretionary trust), you may be able to claim credit for that tax against your own liability.
Your reporting obligation applies even if you don't actually receive the money yourself—the income is treated as yours regardless.
Exceptions and reliefs
The £100 limit for minor children is the main statutory exception. Beyond this, there's little scope to avoid the settlor rules if your arrangement falls within them—that's the point of anti-avoidance legislation.
Trusts created for genuinely independent beneficiaries (not including yourself, your spouse, or your minor unmarried children) won't normally cause you to be taxed as the settlor, provided you've genuinely given away your interest and can't benefit.
Getting it right
These rules are complex and HMRC scrutinises arrangements involving trusts and family companies carefully. If you've set up a trust, made a dividend waiver, or created any arrangement where income goes to family members, you should check whether the settlor rules apply to you.
The consequences of getting this wrong include underpaid tax, interest charges, and potential penalties. Because the rules catch both formal trusts and informal arrangements, you may be affected even if you don't think of yourself as having created a trust.
Sources
This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.
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