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What is a settlor-interested trust?

A settlor-interested trust is one where the person who created the trust, the settlor, has kept for himself some or all of the benefits attaching to the property which he has given away. A straightforward example is where a settlor transfers assets to trustees for the benefit of himself and his family, and the terms of the trust allow income or capital from the trust assets to be paid to him.

In certain circumstances the creation of a settlement would offer a tax advantage because, for example, tax will be deferred or the trustees will pay tax at a lower rate. Tax law operates to remove this advantage if the settlor has not effectively divested himself of the trust property.

The term ‘settlor-interested’ arises in connection with income tax and capital gains tax. For inheritance tax, the creation of a settlement from which the settlor may benefit is categorised as a ‘gift with reservation’.

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