Settlor-Interested Trust Explained

What is a settlor-interested trust?

It is a trust where the settlor has not made a clean break. A trust is settlor-interested if, in any way, the trust property or its income can be paid to or applied for the benefit of the settlor, their spouse or their civil partner (gov.uk HS270, as at July 2026, subject to change). The label describes a tax position rather than a separate kind of trust: a discretionary or interest-in-possession trust can each be settlor-interested.

When does a trust count as settlor-interested?

The test looks at who can benefit, not who does. A trust is caught where the settlor, or their spouse or civil partner, is within the class who can receive income or capital, even if no payment is ever made to them. Special rules also treat certain income paid for a settlor's minor, unmarried child as the settlor's, once that income is more than £100 (gov.uk HS270, as at July 2026, subject to change).

Situation	Usually settlor-interested?
Settlor is a possible beneficiary	Yes
Settlor's spouse or civil partner can benefit	Yes
Income applied for the settlor's minor unmarried child (over £100)	Treated as the settlor's income
Only adult children or grandchildren can benefit	Generally no

Situation

Usually settlor-interested?

Settlor is a possible beneficiary

Yes

Settlor's spouse or civil partner can benefit

Yes

Income applied for the settlor's minor unmarried child (over £100)

Treated as the settlor's income

Only adult children or grandchildren can benefit

Generally no

Source: gov.uk HS270, as at July 2026, subject to change. Whether a particular trust is caught depends on its exact terms, so it can be worth discussing with a qualified professional.

How income tax works

Income tax is the headline feature of a settlor-interested trust. Where the trust is caught, the settlor is generally responsible for income tax on income arising to the trust, even if some of that income is not paid out to them (gov.uk, trusts and income tax, as at July 2026, subject to change). The trustees complete a trust and estate tax return and give the settlor a statement of the income and tax, which the settlor then reports on their own self assessment (gov.uk, as at July 2026, subject to change).

One practical catch is that where the settlor is taxed on the trust income, trust management expenses cannot be deducted to reduce the amount taxable on them (gov.uk HS270, as at July 2026, subject to change). The settlor generally gets credit for tax the trustees have already paid, which can be set against their own liability on the trust income.

See our fuller note on how trusts are taxed for the rates that apply to trustees before the settlor charge.

Capital gains tax on a settlor-interested trust

Capital gains tax follows a different path from income tax here. For a UK resident settlement that is settlor-interested, any capital gains tax on disposals by the trustees is charged on the trustees for the 2008 to 2009 tax year and later years, rather than being passed to the settlor (gov.uk, Capital Gains Manual CG34700, as at July 2026, subject to change). So income can be taxed on the settlor while gains are taxed on the trustees, which often surprises people setting a trust up.

Inheritance tax and settlor-interested trusts

Inheritance tax works separately again and turns on the type of trust, not on whether the settlor can benefit. Most lifetime discretionary trusts fall within the relevant property regime, with their own entry, ten-yearly and exit charges, sitting against the settlor's available nil-rate band of £325,000 per person (gov.uk/inheritance-tax, as at July 2026, subject to change). Where the settlor keeps a benefit, the trust assets may also be treated as remaining in the settlor's estate under the gift with reservation of benefit rules (gov.uk, rules on giving gifts, as at July 2026, subject to change). See our detailed note on inheritance tax on trusts.

A worked example (illustration only). Suppose someone sets up a discretionary trust and is named among the possible beneficiaries. Because the settlor can benefit, the trust is settlor-interested, so the trust income is generally taxed on the settlor even in a year when nothing is paid out, and trust management expenses cannot be deducted against that income (gov.uk HS270, as at July 2026, subject to change). If the trustees later sell an investment at a gain, that capital gains tax is generally charged on the trustees, not the settlor (gov.uk CG34700, as at July 2026, subject to change). Change who can benefit, or the type of trust, and the answer changes, so this is general information rather than a calculation for any real trust.

Settlor-interested trusts and care fees

This is an area to approach carefully rather than as a shortcut. A local authority carrying out a financial assessment can look at whether assets have been given away or placed in trust to reduce what someone pays towards care, under the deprivation of assets rules, and where it decides that avoiding care charges was a significant reason, it can treat the person as still owning those assets (gov.uk, as at July 2026, subject to change). Deliberately putting assets into a settlor-interested trust to sidestep care fees can therefore be challenged. Many people focus instead on care fees planning and on limiting the impact of care costs within the rules, and it can be worth discussing with a qualified professional before acting. For the wider picture, see our estate planning guide.

Settlor-interested trusts in Scotland and Northern Ireland

The tax rules here are UK-wide, so the settlor-interested income tax treatment, the capital gains tax position and the £325,000 nil-rate band apply across Scotland, England, Wales and Northern Ireland alike (gov.uk, as at July 2026, subject to change). What differs is the surrounding trust and succession law. Scotland has its own trust law and its own rules on rights in a deceased's estate, and Northern Ireland has separate court procedures. Where a trust or settlor touches more than one UK nation, it can be worth taking advice in each. For the wider picture, see our estate planning guide.

Frequently asked questions

What makes a trust settlor-interested?

A trust is generally settlor-interested where the trust property or income can, in any way, be paid to or applied for the benefit of the settlor, their spouse or their civil partner (gov.uk HS270, as at July 2026, subject to change). It is the ability to benefit that matters, not whether a payment is actually made, so the exact terms decide the point.

Who pays income tax on a settlor-interested trust?

The settlor is generally responsible for income tax on income arising to the trust, even where some of it is not paid out to them (gov.uk, as at July 2026, subject to change). Trustees complete the trust return and hand the settlor a statement, which the settlor reports on self assessment, and the settlor can generally credit tax the trustees have already paid.

Who pays capital gains tax on a settlor-interested trust?

For a UK resident settlement that is settlor-interested, capital gains tax on the trustees' disposals is generally charged on the trustees for the 2008 to 2009 tax year and later years, not on the settlor (gov.uk CG34700, as at July 2026, subject to change). So income and gains can be taxed on different people within the same trust.

Can a settlor be a beneficiary of their own trust?

Yes, a settlor can be within the class who may benefit, but doing so usually makes the trust settlor-interested for tax, with income generally taxed on the settlor (gov.uk HS270, as at July 2026, subject to change). It can also raise gift with reservation issues for inheritance tax, so many people take advice before including themselves.

Does a settlor-interested trust help with care fees?

It is not a reliable route, and it can be challenged. A local authority can review assets placed in trust under the deprivation of assets rules, and where avoiding care charges was a significant reason it may treat the person as still owning them (gov.uk, as at July 2026, subject to change). Many people focus on care fees planning within the rules and discuss it with a qualified professional.

Can beneficiaries reclaim tax from a settlor-interested trust?

Often not. Where a settlor-interested discretionary trust makes an income payment to the settlor's spouse or civil partner, it can carry a 45% tax credit, but unlike other discretionary trusts that credit generally cannot be reclaimed (gov.uk, as at July 2026, subject to change). The precise treatment depends on the payment and the beneficiary's own position.

About Fairchild Oldfield

The Fairchild Oldfield team brings together estate planning, tax, independent financial advice and client care, working with families across England and Wales.

Fairchild Oldfield are estate planning specialists and will writers, not a firm of solicitors. This article is general information based on practical experience, not legal, tax or financial advice.

Important: This article is general information only and is not legal, tax or financial advice. Reading it does not create a professional relationship. It is based on the law of England and Wales, and other UK jurisdictions may differ. Figures and rules are current as at July 2026 and are subject to change. Before acting, many people choose to seek advice from a suitably qualified professional, such as a solicitor, a STEP practitioner, an accountant, or an FCA-authorised financial adviser, who can consider your individual circumstances.

Settlor-Interested Trusts Explained