Settlor-Interested Trusts and UK Tax Implications

What Is a Settlor-Interested Trust?

When a person (the settlor) creates a trust and settles assets into it, the default expectation under UK tax law is that the trust is now a separate entity — it pays its own income tax, its own capital gains tax, and the settlor has given up the assets. For IHT purposes, a lifetime gift into a discretionary trust is a chargeable transfer (reducing the settlor's nil-rate band and potentially triggering an entry charge).

However, if the settlor — or their spouse or civil partner — can benefit from the trust, the trust is settlor-interested. In that case, UK tax law applies a different and generally harsher set of rules: income and capital gains arising within the trust are attributed back to the settlor and taxed at the settlor's personal rates, as if the trust did not exist for tax purposes.

The settlor-interested rules are anti-avoidance measures. Without them, a settlor could transfer income-producing assets into a discretionary trust, the trust would pay income tax at 45%, and the settlor would retain the economic benefit through distributions — achieving a lower effective tax rate if the settlor was in a lower bracket, or deferring tax indefinitely. HMRC's response has been to attribute the income directly to the settlor and tax it at their rate.

Understanding the settlor-interested rules is essential for anyone creating a trust in the UK — particularly for offshore trust structures where the settlor retains access to the assets through their potential beneficiary status.

All figures and rules are as of the 2025/26 tax year. Legislation in this area changes frequently.

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When Is a Trust Settlor-Interested?

A trust is settlor-interested if any of the following can benefit from it:

• The settlor themselves
• The settlor's spouse or civil partner (including a separated spouse who has not divorced)
• A company controlled by the settlor or their spouse

"Can benefit" is broadly interpreted. It includes:

• Direct entitlement as a named beneficiary
• Membership of a discretionary class of beneficiaries (even if distributions have never been made)
• The ability to benefit indirectly — for example, if a company owned by the settlor is a beneficiary
• The settlor's spouse having any potential benefit, even if the settlor has none

Important exception — minor children: Under the parental settlement rules (s.629 ITTOIA 2005), income from assets settled by a parent that is paid to or for the benefit of a minor unmarried child is taxed as the parent's income regardless of whether the parent can personally benefit from the trust. This is a separate but related anti-avoidance rule.

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Income Tax: The Attribution Rules

UK Resident Trusts (s.624–628 ITTOIA 2005)

For a trust governed by UK law (or administered in the UK) where the settlor is UK resident, the trust's income is taxed as the settlor's income under the "settlements legislation" (Part 5, Chapter 5 ITTOIA 2005). This applies even if:

• The income is retained in the trust and not distributed
• The income is distributed to other beneficiaries
• The settlor receives no actual payment

The settlor is taxed at their marginal income tax rate (up to 45% for income above £125,140 as of 2026). A credit is available for tax paid by the trustees on the same income, preventing double taxation.

Offshore Trusts (s.720–730 ITA 2007 — Transfer of Assets Abroad)

For offshore trusts where the settlor is UK resident, the "transfer of assets abroad" rules apply. Under s.720 ITA 2007:

• If a UK-resident individual transfers assets to an offshore person (including an offshore trust)
• And as a result, income becomes payable to that offshore person
• And the UK-resident individual has the "power to enjoy" the income

…then that income is attributed to the UK-resident settlor and taxed at their marginal rate.

"Power to enjoy" is very broadly defined and includes situations where the income is accumulated, reserved for future benefit, or applied for the settlor's benefit in any way. A settlor who is within the class of beneficiaries of an offshore discretionary trust almost certainly has a power to enjoy.

There is a motive defence: the individual can demonstrate that the transfer was not made with a view to avoiding UK income tax, or that avoidance was not one of the purposes. In practice, HMRC scrutinises motive defences carefully and they are difficult to establish.

Practical Result

For an offshore discretionary trust with a UK-resident settlor who is within the class of beneficiaries:

• All trust income (wherever arising, whatever the nature) is taxed on the settlor in the UK
• The settlor must report this on their self-assessment return, even if they receive nothing
• Credits for offshore withholding tax and trust-level tax paid are available

This is a significant cost and compliance burden. Settlors of offshore trusts who are UK residents typically include themselves as beneficiaries for asset protection (the trust provides a safety net if needed), accepting the income tax attribution cost in exchange for the IHT and succession planning benefits of the excluded property structure.

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Capital Gains Tax: The Attribution Rules

UK Resident Trusts (s.77 TCGA 1992)

For UK-resident discretionary trusts, gains realised on trust assets are normally taxed at the trust rate (24% on all assets — residential and other — for disposals on or after 30 October 2024, as of 2025/26). However, under s.77 TCGA 1992, if the trust is settlor-interested, the gains are attributed to the settlor and taxed at the settlor's CGT rates rather than the trust's.

For higher and additional rate taxpayers, the trust rate and the individual higher rate are the same (both 24%), so s.77 does not change the effective tax rate for them. But it does mean the settlor uses their own annual exempt amount against the trust's gains, which may be less favourable than the trust having its own exempt amount.

Offshore Trusts (s.86 TCGA 1992)

For offshore trusts where the settlor is UK resident, s.86 TCGA 1992 attributes trust gains to the settlor where:

• The settlor has an interest in the trust (which includes being within the class of beneficiaries)
• The settlor is UK resident for the year in question

The domicile/deemed-domicile condition that previously formed part of the s.86 test was removed by Finance Act 2025 with effect from 6 April 2025, in line with the abolition of domicile as a connecting factor. The gains are attributed to the settlor and taxed at their personal CGT rates. Again, this applies whether or not the settlor actually receives any distribution.

For new arrivers, gains attributed under s.86 can fall within the four-year Foreign Income and Gains (FIG) regime that replaced the remittance basis from 6 April 2025. After the four-year period, gains attributed under s.86 are taxable in the UK.

The s.87 "Stockpile" Rules (Beneficiary Attribution)

Where gains are not attributed to the settlor (for example, because the settlor is not UK resident in the year of the gain, or is non-UK domiciled and the FIG period has expired), they are stored in a "pool" under s.87. When a UK-resident beneficiary receives a capital payment from the trust, gains from the pool are matched to that payment and taxed on the beneficiary. This prevents indefinite deferral of offshore trust gains.

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IHT Implications of Settlor-Interested Trusts

The settlor-interested rules for income tax and CGT are entirely separate from the IHT treatment of the trust. A settlor-interested offshore trust that holds excluded property (non-UK assets settled by a non-UK domiciliary before deemed domicile) still benefits from excluded property status for IHT.

However, a settlor who retains a benefit from a trust may face IHT implications under the gift with reservation of benefit (GROB) rules (s.102 FA 1986). If the settlor settles assets into a trust but retains a benefit (including the mere ability to benefit as a discretionary object), the assets may be treated as remaining in the settlor's estate for IHT — potentially negating the IHT planning benefit.

The interaction between:

• The excluded property trust (removing assets from UK IHT)
• The settlor-interested income tax rules (attributing trust income to the settlor)
• The gift with reservation rules (potentially keeping assets in the settlor's estate)

...is one of the most complex areas of UK trust tax law. The key point is that these rules operate independently: an EPT may protect from IHT even where the settlor-interested income tax rules apply, but only if the excluded property conditions are correctly met.

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Strategies for Managing Settlor-Interested Trust Tax

Option 1: Exclude the settlor and their spouse from the class of beneficiaries

If the settlor cannot benefit, the trust is not settlor-interested. The income tax and CGT attribution rules do not apply. The trade-off is that the settlor gives up the "safety net" of being able to benefit in emergencies.

Option 2: Accept the attribution and plan around it

For many HNW individuals, the income tax and CGT attribution cost is acceptable given the IHT and succession planning benefits of the trust. The settled assets may not generate large amounts of income (for example, if the trust holds zero-coupon bonds or accumulating funds), reducing the income tax cost while the capital benefit remains.

Option 3: Use a "protective" structure

Some structures use a combination of a family investment company (FIC) held within the trust, or accumulating fund structures, to manage the income flow and reduce attribution. This requires careful advice.

Option 4: Non-resident settlors

If the settlor is not UK resident, the UK income tax attribution rules do not apply. For internationally mobile families who spend extended periods outside the UK, this may be a relevant consideration — though the rules on split-year treatment and statutory residence testing are complex.

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Reporting Requirements

Settlors of settlor-interested trusts (whether UK resident or offshore) must:

• Report the attributed income on their UK self-assessment return (SA100/SA105)
• Report attributed capital gains
• Comply with the Trust Registration Service (TRS) requirements — all UK trusts and most offshore trusts with UK tax consequences must be registered with HMRC
• Disclose relevant offshore structures in the "offshore matters" section of their tax return

Non-compliance with TRS and self-assessment reporting can result in significant penalties.

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How Global Investments Can Help

Settlor-interested trust taxation is one of the most technically demanding areas of UK personal tax. At Global Investments, we work with specialist UK tax counsel and offshore trust advisers to help internationally mobile HNW clients understand their current trust arrangements, identify potential exposures, and restructure where appropriate.

Whether you are considering a new trust structure, reviewing an existing offshore trust, or dealing with compliance obligations arising from a settlor-interested arrangement, we can help you navigate the rules.

Contact us for a confidential tax planning review.

This guide is for general information only and does not constitute tax or legal advice. Trust taxation is complex, fact-specific, and subject to frequent legislative change. Always seek qualified professional advice before taking any action. As of 2026.