How are Will Trusts taxed?

If you're wondering how Will Trusts are taxed, this guide explains how Income Tax, Capital Gains Tax (CGT), and Inheritance Tax (IHT) apply to Trusts created by a Will. Understanding these rules helps Trustees manage funds properly and ensure compliance. 

Income Tax 

Most Will Trusts must pay Income Tax on interest, rent, or dividends received. If the annual income is below £500, no tax is due. Exceed that, and Trustees pay tax at the Trust rate: 45% on ordinary income, and 39.35 % on dividend income.  

Some interest income may be distributed directly to beneficiaries. In such cases, Trustees issue a certificate (R185) showing the tax paid, and the beneficiary must include the gross income in their tax return. 

Capital Gains Tax (CGT)

When Trust property or investments are sold for a profit, Trustees need to calculate whether a gain arises above the £1,500 annual exemption (or £3,000 if a vulnerable beneficiary benefits under the age of 18). Taxes are calculated and paid by the Trustees.   

Where Trust assets are transferred to beneficiaries, Trustees can apply hold‑over relief so the beneficiary defers the gain until they later dispose of the asset, reducing immediate CGT.  

Inheritance Tax (IHT) within a Will Trust 

Will Trusts (also known as Testamentary Trusts) are generally created at death. The value of transferred assets forms part of the deceased's estate and is covered by standard IHT rules. No further IHT arises at the point of Trust creation.  

However, the Trust remains potentially subject to periodic charges: every ten years, a “relevant property” Trust may incur a charge of up to 6 % on any value above the Nil Rate Band. When assets leave the Trust, an exit charge may apply.  

Certain types of Will Trusts, such as Bereaved Minor Trusts or 18–25 Trusts, may benefit from simplified or lower tax treatment.  

When Trustees, beneficiaries, or settlors pay 

For most Trusts, Income Tax and Capital Gains Tax are paid by Trustees. If income is passed directly to beneficiaries under a Beneficiary‑Entitled Trust, tax is paid by the beneficiary. The deceased’s estate handles the main IHT liability at death; Trustees handle any ongoing IHT charges later.  

Putting it all together 

Here’s a summary of how Will Trusts are taxed: 

Will Trusts bring valuable flexibility and protection to estates, but they bring complex tax responsibilities too. Knowing how Will Trusts are taxed helps Trustees plan distributions and maintain compliance with HMRC rules.