Discretionary trust for vulnerable beneficiaries (such as disabled people) can pay tax at the lower rates if an election is made. Discretionary trusts pay tax at the lower rates on income up to £1,000.

Beneficiaries of life interest trusts are treated as entitled to the income of the trustees, and pay tax on it in the year it arises to the trust, with a credit for tax paid by the trustees. Beneficiaries of discretionary trusts pay tax on income distributed to them by the trustees, which is treated as paid with a tax credit of 40/60 of the cash received. If the tax credit on either types of trust exceeds the beneficiary’s tax liability, the excess can normally be reclaimed by the beneficiary (unless credits on dividends in life interest trust).

The CGT annual exemption is divided between trusts established by the same settler since 1978, to a minimum of £960.

Trusts are also liable to pay inheritance tax in a variety of circumstances, and trustees should make sure that they have appropriate professional advice to enable them to fulfil all their legal and fiscal responsibilities. In particular, changes to the IHT treatment of trusts introduced in 2006 take effect for many pre-existing trusts on 6 April 2008. Trustees of such trusts should make sure they are aware of the effect on them.