Technical article

United Kingdom: The 45% Trust Rate and Why It Keeps Showing Up

The trust pays 45%, the grandchild gets that back to the extent it is more than their own tax, and the family is whole.

By Neil Solomon · 3 min read

Picture a retired couple from Manchester who set up a trust for their three grandchildren. The trust owns a share portfolio and a rented flat. Each year the trustees pay the whole income out. The couple expect the trust to pay little, because the money passes straight through. Then the tax return shows 45%.

This surprises many families, and the reason is how the UK treats a trust where the trustees choose who is paid.

What the trust pays

For a discretionary or accumulation trust, the rates for 2026-27 are fixed by the trust type, not by what the trustees do with the money.

The dividend rate for the first type is 39.35%. The lower dividend rate for the second type was 8.75% until 5 April 2026 and is 10.75% afterwards. Trustees cannot use the dividend allowance that an individual gets.

The first GBP 500 of income is not taxed. That figure drops to GBP 100 per trust when the same person set up five or more trusts. The GOV.UK page shows no separate lower band for trusts. Gains are taxed to the trustees at 24%, with a yearly exempt amount of GBP 1,500.

Why paying it out does not lower the bill

The trust pays 45% first. When the trustees pay income to a beneficiary, the UK treats that payment as already taxed at 45%, and gives the beneficiary a credit for it. A UK taxpayer who pays tax at a lower rate can reclaim the difference through a repayment form or the yearly tax return. A UK taxpayer at 45% has nothing to reclaim.

So for a grandchild living in the UK, the credit works. The trust pays 45%, the grandchild gets that back to the extent it is more than their own tax, and the family is whole.

The heir who lives abroad

The official page describes the credit for people who file a UK return. It says nothing about a beneficiary who lives outside the UK. An online forum of UK accountants disagreed on whether such income counts for a non-resident at all, and no treaty position was stated. What is clear is that the trust pays the 45% each year. Whether an heir in Spain or Mexico can get any of it back may depend on the heir's country and the treaty between the two.

A trust with no UK trustee is a different case. From 6 April 2025 a trust is non-UK resident if none of its trustees is UK resident, and its foreign income is outside UK tax. UK-source income, such as rent from a UK flat, can stay taxed at up to 45%.

When the settlor is taxed instead

If the person who set up the trust, or their spouse or civil partner, can benefit from it, the settlor is taxed on all of the trust income as their own, whether or not it is paid out. The trustees still pay as it arises, and the settlor gets a credit for it. The same applies to payments for the settlor's young unmarried children.

You might say: "A trust that pays out everything has no reason to pay 45%. That seems like a rule built to punish families." The rule is built to stop a trust being used to hold income at low rates for someone else. The credit is what balances it for beneficiaries who pay UK tax. The gap only appears when the heir is outside that system.

You could ask yourself two things. Where do the heirs live, and where do the trustees live?

If you have set up or received from a UK trust, how did the credit work out for your family? Share it here, because someone in the same position may benefit from your story.

Figures are estimates for planning, based on public data. Date read: October 2026.