Trusts and their tax treatment

How a trust's income is taxed depends entirely on what kind of trust it is. A bare trust is transparent: the beneficiary is treated as owning the income from the outset, taxed on them directly at their own rates, with no tax at trustee level at all. An interest-in-possession (IIP) trust — where a beneficiary has an automatic right to the income — is taxed on the trustees at basic rates: 20% on interest, 8.75% on dividends. A discretionary trust, where trustees decide who gets what, is taxed at the much higher trust rates instead: 45% on interest, 39.35% on dividends — but only above a £500 de minimis that's split between all of a settlor's trusts (floored at £100 each) and applies as a cliff, not a deduction: below it nothing is taxed, at or above it everything is taxed from the first pound.