The definition and why it exists
A trust is settlor-interested where its property, or income from it, can be paid to or applied for the benefit of the settlor or the settlor's spouse or civil partner, even if benefit is only a possibility and even if the settlor is one of many discretionary beneficiaries. HMRC treats the settlor as retaining an interest if the settled property, or anything deriving from it, may become applied for their benefit; only narrow outcomes such as a benefit arising on a beneficiary's bankruptcy are ignored. The rule is anti-avoidance: without it, a person could shelter income inside a trust while keeping access to it. For income tax there is an extra category, the parental settlement rule, which taxes income paid to or for the settlor's unmarried minor child on the parent where it exceeds £100 in the tax year.
The income and capital gains consequences
The income of a settlor-interested trust is treated as the settlor's and taxed on them as it arises under section 624 ITTOIA 2005, whether the trust is discretionary, accumulation or interest in possession, and even if the income is never paid out. The settlor reports it on their own Self Assessment return with credit for tax the trustees have paid. For capital gains, a UK trust's gains are taxed on the trustees, but hold-over relief is denied on gifts into a settlor-interested settlement under TCGA 1992 s.169B and can be clawed back under s.169C, so transferring assets with built-in gains can crystallise an immediate CGT charge. For offshore trusts the position is tougher still: gains can be attributed directly to a UK-resident settlor under TCGA 1992 s.86 as they arise, and since 6 April 2025 protected settlement status is gone, so a settlor outside the 4-year FIG regime is taxed on the trust's worldwide income and gains on the arising basis, as our offshore trusts guide explains.
The inheritance tax trap
Most lifetime discretionary trusts, including settlor-interested ones, fall within the relevant property regime: an entry charge of 20% on value settled above the £325,000 nil-rate band, a principal charge of up to 6% at each 10-year anniversary, and exit charges when assets leave. On top of that, a settlor who can benefit has reserved a benefit in the gifted property, so the trust assets are also treated as remaining in their estate and can be charged at 40% on death, potentially alongside the relevant property charges. Since 6 April 2025, whether non-UK trust assets are excluded property turns on the settlor's long-term UK residence rather than domicile. The interaction of these regimes needs careful handling to avoid double exposure, and Horizon advises on trust structures for a fixed fee agreed upfront, starting with a free clarity call.