October 1, 2026/
Business & Tax News and Developments September 2026 Home News Business &...
Family trusts have long played an important role in succession planning. For business owners in particular, a discretionary trust can provide a controlled way to pass wealth to future generations without giving beneficiaries immediate ownership of valuable assets.
But the tax environment is changing.
Changes following the Autumn Budget 2025 mean trustees and families should reconsider how income is generated, retained and distributed through discretionary trusts. This is particularly relevant for trusts holding investment property, cash deposits, company shares or investment portfolios.
For business owners who already use a family trust as part of their succession planning, now is a sensible time to review whether the structure remains tax-efficient.
For 2026/27, accumulation and discretionary trusts are generally taxed at 45% on taxable non-dividend income and 39.35% on dividend income, subject to the £500 de minimis rule.
From 6 April 2027, the trust rate applying to property and savings income is due to increase to 47%, while the 45% rate continues to apply to other non-dividend income.
The nature of the income held within a family trust will therefore become increasingly important when considering whether income should be accumulated or distributed to beneficiaries.
A discretionary trust gives trustees considerable flexibility over which beneficiaries receive income or capital, how much they receive and when.
This can be particularly useful where a business owner wants to transfer wealth to children or future generations without immediately giving them outright ownership or control.
For example, a family trust might hold shares in a family company for the benefit of children and future generations. Rather than each beneficiary having an automatic entitlement, the trustees retain discretion over distributions in accordance with the trust deed.
That flexibility is one of the main attractions of discretionary trusts. However, it comes with a relatively high rate of Income Tax, making ongoing tax planning essential.
For the 2026/27 tax year, the principal rates applying to accumulation and discretionary trust income are:
The former standard rate band for trusts was abolished from 6 April 2024.
Instead, qualifying trusts can benefit from a £500 de minimis amount. Where the trust’s income does not exceed the applicable limit, there is generally no Income Tax charge. However, where income exceeds the limit, the full amount becomes taxable rather than only the excess.
Where the same settlor has created more than one qualifying accumulation or discretionary trust, the £500 amount may need to be divided between those trusts, subject to a minimum of £100 per trust.
Trustees do not benefit from the personal allowances available to individuals, including the personal savings allowance or individual dividend allowance.
This can make accumulating significant amounts of income within a discretionary trust comparatively expensive.
Business & Tax News and Developments September 2026 Home News Business &...
Right to Work Checks Change on 1 October 2026: What Employers Must...
Fraud, Convictions & Sentences – September 2026 Home News Fraud, Convictions &...
91% Tax on Inherited Pensions? What Changes in April 2027 Home Blogs...
£91bn Pension Withdrawals: Review Your Inheritance Tax Exposure Before 2027 Home Blogs...
Illegal Airbnb Subletting: Westminster Seeks HMRC Data to Identify Suspect Lets Home...
From 6 April 2027, the rates applying to accumulation and discretionary trusts are due to include:
The change is particularly relevant to family trusts holding investment property or substantial cash balances.
Consider a discretionary trust receiving £30,000 of taxable rental income. Ignoring other adjustments, tax at 45% would amount to £13,500. At 47%, the equivalent liability would increase to £14,100.
A £600 annual difference may not appear substantial in isolation. Across a larger property portfolio or a trust intended to operate for several decades, however, the cumulative tax cost can become significant.
Trustees should therefore consider the trust’s investment strategy alongside the family’s wider succession objectives rather than viewing the two separately.
Certain trust management expenses properly chargeable against income can be taken into account when calculating the trustees’ tax liability.
The rules are more restrictive than simply deducting every cost incurred by the trustees. Expenses relating to capital or benefiting the trust as a whole will not necessarily qualify for Income Tax purposes.
For accumulation and discretionary trusts, qualifying trust management expenses are generally taken against dividend-type income before other income.
The distinction can become important where a trust has substantial investment income and significant professional or management costs.
The taxation of a discretionary trust does not necessarily end when the trustees pay tax on the income. When discretionary trust income is distributed to a beneficiary, the payment is generally treated as carrying a 45% tax credit.
The trustees provide the beneficiary with form R185, showing the trust income and associated tax credit. The beneficiary then takes the gross trust income into account for their own tax purposes.
Importantly, the income generally loses its original character when distributed. For example, where a trust receives dividend income and later distributes that income to a beneficiary, the beneficiary does not simply treat the payment as an ordinary dividend. It is treated as trust income and does not benefit from the normal personal dividend tax rates or dividend allowance.
Depending on the beneficiary’s own tax position, some of the 45% tax credit may be reclaimable. This can create useful planning opportunities where beneficiaries have different income levels and marginal tax rates, but distributions should be considered carefully before payments are made.
Trustees making discretionary income distributions need to monitor the trust’s tax pool.
The tax pool broadly records the relevant Income Tax paid by the trustees that is available to support the tax credits attached to discretionary income distributions.
This matters because distributions carry a 45% tax credit even where the underlying income may originally have been taxed within the trust at a lower rate.
Suppose trustees make a net income distribution of £55,000.
The corresponding gross distribution is £100,000 and carries a £45,000 tax credit.
If the trust has only £38,000 available in its tax pool to support that credit, there is a £7,000 shortfall. The trustees can consequently face an additional tax charge to make up the difference.
This is particularly relevant where trusts receive significant dividend income taxed at 39.35% but subsequently make income distributions carrying a 45% tax credit.
Trustees should therefore model the tax consequences of significant distributions before making them rather than treating the tax calculation as an administrative matter after the event.
Special anti-avoidance provisions can override the normal discretionary trust tax treatment.
One important example is a settlor-interested trust, where the person who established the trust — the settlor — or their spouse or civil partner can benefit from it.
Where the relevant legislation applies, trust income can be treated as the settlor’s own income for Income Tax purposes even though the money has been received by the trustees.
The settlor may therefore need to report the relevant income through their personal Self Assessment tax return and pay tax according to their own circumstances.
Depending on the circumstances, the settlor may be able to recover from the trustees tax they have paid as a result of the income being attributed to them.
This is why the trust deed, identity of beneficiaries and circumstances of the settlor must be considered before reaching conclusions about the tax treatment of a family trust.
Additional anti-avoidance provisions apply where parents provide assets that generate income for their unmarried minor children.
Broadly, where income arising from a settlement made by a parent for an unmarried minor child exceeds £100 in a tax year, the relevant income can be treated as the parent’s income for tax purposes.
The £100 limit applies separately to each parent.
Placing investments into a trust for young children therefore does not automatically transfer the Income Tax liability away from the parents.
The position can be different once children reach adulthood, which is one reason succession planning should consider the beneficiaries’ ages and circumstances rather than simply focusing on the trust itself.
Yes, but the answer depends on what the family is trying to achieve.
A discretionary trust is rarely used simply because it provides the lowest immediate rate of Income Tax. Its real value is usually the combination of control, flexibility, asset protection and long-term succession planning.
For some families, the higher tax rates applying within a trust may be an acceptable cost of retaining control over when and how wealth passes to beneficiaries.
For others, accumulating substantial rental or savings income within a discretionary trust may become increasingly expensive, particularly once the 47% rates apply from April 2027.
The better question is therefore not simply:
“Does a family trust save tax?”
It is:
“Does the trust still achieve the family’s succession objectives in the most tax-efficient way available?”
One of the most common mistakes with established family trusts is assuming that a structure which was appropriate when created will remain appropriate indefinitely.
Tax legislation changes. Children become adults. Family circumstances evolve. Businesses are sold and investment strategies change.
A trust originally established to hold shares in a family company may, following a business sale, suddenly hold substantial cash or investment assets instead. That can fundamentally change its tax profile.
Trustees and business owners should periodically review the assets held by the trust, the type of income being generated, whether income should be accumulated or distributed, the available tax pool and the personal tax positions of the beneficiaries.
They should also consider whether the settlor-interested or parental settlement rules apply and, more fundamentally, whether the trust continues to achieve the succession objectives for which it was originally established.
A family trust should be reviewed as part of the family’s wider tax, investment and succession strategy rather than in isolation.
Discretionary trusts remain valuable succession-planning vehicles for UK families and business owners. They can provide control and flexibility that an outright gift to children or other family members simply cannot offer.
But that flexibility comes with a complex tax regime.
For 2026/27, discretionary trust income can already face tax rates of 45% or 39.35%, depending on the nature of the income. From April 2027, property and savings income within these trusts is due to face a 47% rate.
Trust distributions can also create additional liabilities where the tax pool is insufficient, while settlor-interested and parental settlement rules can result in income being taxed on the settlor rather than the trustees.
For families with established trusts, the response should not automatically be to unwind the structure. Instead, the trust should be reviewed before significant investment or distribution decisions are made to establish whether it continues to achieve its intended purpose efficiently.
If you have an existing discretionary trust, are considering transferring business or investment assets into a family trust, or want to establish whether your existing succession arrangements remain tax-efficient, specialist advice should be taken before making changes.
Naail & Co can review your trust arrangements alongside your wider personal, business and succession objectives and advise on the tax implications of retaining income, making distributions or restructuring your arrangements.
Get in touch with Naail & Co to book your free initial consultation.
Monday – Friday
9:00 am – 5:30 pm
Budget 2025: Tax on Savings interest increased by 2% How the 2% Rise Affects Your Savings Table of Contents Savings...
Budget 2025: writing down allowance reduced to 14% How Budget 2025 Impacts Your Tax Relief Strategy Table of Contents Writing...
Budget 2025: Property Income tax increased by 2%2026 Rise in Tax on UK Property Income from 2027 – Landlord Guide...
Subscribe to our newsletter to receive our weekly feed.
69-71 Lambeth Walk London SE11 6DX
Monday – Friday 9:00 am – 5:30 pm
Subscribe to our newsletter
Follow us
Download from
Services
DROP US A LINE
Copyright 2024 Naail & Co | Designed by Orion Global Consulting. | Naail & Co is the trading name of Naail & Co Ltd | Company registration number 08606377 | VAT registration number 170 3380 31
