Income from Trusts and Estates: 2026/27 UK Tax Guide

Navigating the taxation of income from trusts and estates requires a precise understanding of the evolving legislative landscape. The Finance Act 2026 introduced critical reforms for the 2026/27 tax year, significantly altering the tax rates applied to certain types of trust income. Concurrently, the recently established £500 de minimis limit continues to simplify administration for low-income trusts and estates.

This comprehensive guide details how HMRC taxes trustees, personal representatives, and beneficiaries on income from trusts and estates in the 2026/27 tax year.

The 2026/27 Trust Tax Rates: Introduction of the 47% Rates

Historically, trustees of accumulation and discretionary trusts paid a unified “trust rate” on most non-dividend income. However, the Finance Act 2026 fundamentally changed this framework by introducing specific rates for different income streams.

For the 2026/27 tax year, the government raised the rates on property and savings income to ensure income from assets is taxed more rigorously.  Schedule 1 to the Finance Act 2026 explicitly amended section 9 of the Income Tax Act 2007 (ITA 2007) to establish two new rates exclusively for trustees.

“In section 9 (the trust and dividend trust rate)— (a)after subsection (1) insert— “(1A)The property trust rate is 47%. (1B)The savings trust rate is 47%.””

Therefore, trustees of discretionary trusts face the following tax rates in 2026/27:

These changes mean trustees must carefully segregate their income streams, as residential and commercial rental income, alongside bank interest, now suffer a punitive 47% tax charge at the trust level.

The £500 De Minimis Exemption

To ease the administrative burden on smaller entities, the government introduced a £500 de minimis limit, effective from the 2024/25 tax year onwards.  This measure replaced the old £1,000 standard rate band, which the government formally repealed.

Under section 24B of ITA 2007, if the total net income of the trustees or personal representatives for the tax year is £500 or less, HMRC treats that income as £0 for tax calculation purposes.

Crucially, this is a “cliff-edge” exemption. If the trust or estate generates £501 of net income, the entire £501 becomes fully taxable at the relevant rates.

For settlors who have established multiple discretionary trusts, the legislation contains an anti-fragmentation rule. The £500 limit is divided by the number of current trusts created by that settlor, subject to a strict minimum allowance of £100 per trust.

Discretionary Trusts and the Tax Pool

When trustees of a discretionary trust distribute income to beneficiaries, they operate a vital mechanism known as the tax pool.

The Court of Appeal in Hugh Murphy & Anor v The Commissioners for HMRC clearly outlined how this credit mechanism prevents double taxation.  When trustees distribute income, the beneficiary receives a net amount. The tax system grosses up this payment (typically by 45%) so the beneficiary receives a tax credit for the tax the trustees already paid.

“The payment shall be treated as a net amount corresponding to a gross amount from which tax has been deducted at a rate equal to the sum of the basic rate and the additional rate in force for the year in which the payment is made”.

The trustees must ensure their “tax pool” (the actual tax they have paid to HMRC, including the new 47% property and savings rates) is sufficient to cover the tax credit attached to the beneficiary’s distribution.  If the tax pool falls short, the trustees must pay a supplementary charge under section 496 of ITA 2007 to make up the difference. Beneficiaries who are non-taxpayers or basic rate taxpayers can then claim a refund of this tax credit through their Self-Assessment tax return.

Taxation of Interest in Possession (IIP) Trusts

Unlike discretionary trusts, beneficiaries of Interest in Possession (IIP) trusts hold a legal right to the trust income as it arises.

For IIP trusts, the trustees pay tax at the basic rates: 20% on non-dividend income and 10.75% on dividend income for the 2026/27 tax year.  The punitive 47% property and savings trust rates do not apply to standard IIP trustees.

The beneficiary declares this income on their personal tax return and receives a tax credit for the basic rate tax paid by the trustees. If the beneficiary is a higher or additional rate taxpayer, they must pay the remaining balance personally.

Income from Deceased Estates

Personal representatives managing a deceased person’s estate face a slightly different regime than trustees. They pay tax at the basic rates (20% on savings/other income and 10.75% on dividends).

When the personal representatives distribute estate income to the beneficiaries, section 649 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) dictates the tax treatment.  The income is taxed in the hands of the beneficiaries and is deemed to have borne tax at the basic, savings, or dividend rates.

Importantly, the £500 de minimis limit flows through to the beneficiaries. If the estate’s total net income is £500 or less, the personal representatives pay no tax, and section 649(1A) of ITTOIA 2005 ensures that the beneficiaries are also not charged to tax on that specific estate income.

“But income tax is not charged on estate income so far as that income consists of a basic amount which section 679 treats as having been paid from de minimis aggregate income.”

Consider reviewing your clients’ existing discretionary trust structures to assess the impact of the new 47% property and savings rates and whether restructuring the trust’s investment portfolio is necessary.