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This type of Trust exists when a beneficiary, known in this case as an 'income beneficiary', has a current legal right to the income from the Trust as it arises. The trustees must pass all of the income received less any trustees' expenses and tax, to the beneficiary.
A beneficiary who is entitled to the income of the Trust for life is known as a 'life tenant' (a 'liferenter' in Scotland) or as having a 'life interest' (a 'liferent interest' in Scotland).
The income beneficiary need not, and often does not, have any rights over the capital of such a Trust. Normally, the capital will pass to a different beneficiary, or beneficiaries, at a specific time in the future or after a specific future event. Depending on the terms of the Trust, the trustees might have the power to pay capital to a beneficiary even though that beneficiary only has a right to receive income.
A beneficiary who is entitled to the Trust capital is known as the 'remainderman' ('fiar' in Scotland) or the 'capital beneficiary'.
The trustees are normally chargeable to income tax on income received, so
Rent and trading income are chargeable at the basic rate (currently 22%)
UK dividend income is chargeable at the starting rate for dividends (currently 10%) and the tax credit attached to the net dividend meets the trustees' liability.
Aavings income, such as bank interest, is chargeable on the trustees at the lower rate (currently 20%). Such income usually has tax deducted at source by the bank or building society, and this is taken into account in taxing the trustees.
The beneficiaries are entitled to the income from the trust after tax and expenses, and are taxed on this in the normal way. They are entitled to credit for tax paid by the trustees or deducted at source.
If beneficiaries are starting rate taxpayers or non-taxpayers they will be able to reclaim some or all of the tax paid, though tax credits on dividends cannot be paid. If they are liable at higher rates, further tax will be due.