Is a Settlor-Interested UK Trust a US Grantor Trust?

No. A settlor-interested UK trust is not automatically a US grantor trust, and a US grantor trust need not be settlor-interested. The UK asks whether the settlor or spouse can benefit. The US asks who the settlor is, who can benefit and who controls. The two tests can produce all four combinations.

Families usually discover this when a UK adviser says "it's settlor-interested, so it's all taxed on you anyway" and a US preparer reaches a different answer from the same deed. Both may be right. Each is answering a question from a different statute, with different definitions of who counts.

Key takeaways

• The labels come from different tests. UK status turns on ITTOIA 2005 sections 624 and 625. US status turns on IRC sections 671 to 679.
• The settlor's nationality changes the US answer. A US settlor faces section 679 and the retained-interest rules. A non-US settlor is held to the narrow routes in section 672(f).
• One extra beneficiary can split the result. Adding a child to a UK settlor's spouse trust leaves it settlor-interested in the UK and generally ends US grantor status.
• "Both yes" still splits on gains. Income follows the settlor in both countries. UK capital gains tax on a UK-resident trust is usually a trustee matter.
• US reporting follows US status alone. A trust the US treats as owned files Form 3520-A, and its US owner files Form 3520, whatever the UK calls it.
• The treaty has a trust rule, but it sits in the Exchange of Notes rather than in Article 24.

What is a settlor-interested trust for UK tax purposes?

Under section 624 of the Income Tax (Trading and Other Income) Act 2005 trust income is treated "as the income of the settlor and of the settlor alone" where it arises during the settlor's life from property in which the settlor has an interest. Section 625 defines that interest widely: there are "any circumstances" in which the property is payable to, or applicable for the benefit of, the settlor or the settlor's spouse, or may become so.

Two features matter for the comparison that follows. HMRC's trust manual says the rule applies regardless of who else benefits, so a trust for spouse and children is caught. And the UK has no single test: non-resident trust gains under section 86 of the 1992 gains legislation use a wider family, reaching children and grandchildren, so a trust can be outside section 624 and still inside section 86.

How do you know if you have a grantor trust with a foreign grantor?

Start with the person who funded the trust, because the US applies a different gate to each kind of settlor.

A US citizen or resident settlor. The retained-interest sections apply, such as section 677 (income that may go to the grantor or spouse without an adverse party's consent) and section 674 (power over who benefits). For a foreign trust, section 679 is the blunter tool: a US person who transfers property to a foreign trust is treated as owner of that portion "if for such year there is a United States beneficiary". A contingent interest generally counts, so the trust deed has to rule out US persons entirely to escape.

A non-US settlor. Section 672(f) generally switches the grantor rules off unless one of two conditions is met. Either the settlor alone can revest the property in themselves, or "the only amounts distributable" during the settlor's lifetime go to the settlor or spouse. An IRS practice unit, which is a draft and not official law, puts the default plainly: "A trust with a foreign settlor will generally be considered a non-grantor trust."

A UK trust is usually a foreign trust in US eyes, because a court in the UK supervises it or non-US trustees control its decisions. So section 679 and the foreign trust forms are normally in play.

Does settlor-interested mean grantor? The four outcomes

We built this table to map one set of facts against both tests. It reads the statutes side by side and is a starting point for a reviewer with the actual deed, not a conclusion about any particular trust.

| Family facts | UK settlor-interested? | US grantor trust? | What that produces |

|---|---|---|---|

| US citizen settlor; settlor or spouse may benefit | Yes (s.625) | Yes (s.677 or s.679) | Income on the same person in both countries. Gains can still split |

| UK settlor, not a US person; irrevocable; spouse and children may benefit | Yes ("regardless of who else benefits") | Generally no: s.672(f) fails because others can receive during life | UK taxes the settlor. A US-resident child is a beneficiary of a foreign non-grantor trust |

| US citizen settlor; settlor and spouse excluded; adult US child may benefit | No | Yes (s.679) | US taxes the settlor. UK looks to the trustees or the beneficiary |

| UK settlor, not a US person; settlor and spouse excluded; adult beneficiaries | No | No | Separate-trust treatment in both countries |

The second row catches the most families, because it looks harmless. A UK grandparent's trust for a spouse and children is routine UK planning. If one of those children later moves to New York, nothing about the UK treatment changes, but that child has received an interest in a foreign non-grantor trust, with the distribution and accumulation rules that follow.

Where the tests disagree at the edges

The table covers the common shapes. These narrower points catch people who have read the headline rule correctly.

| Point | UK rule | US rule | Effect |

|---|---|---|---|

| Separated spouse | s.625(4) drops a spouse where separation "is likely to be permanent" | s.672(e) drops a spouse only under a decree of divorce or separate maintenance | An informal separation can leave a trust US-grantor but no longer UK-interested |

| Control without benefit | s.625 looks at who can benefit | s.674 looks at who controls benefit | A settlor with a retained power but no benefit may be a US owner only |

| Minor children | s.629 taxes the settlor on income paid to their own minor child | s.677(b) reaches only amounts actually applied to support | The UK charge can be wider than the US one |

| Moving to the US | No equivalent trigger | s.679(a)(4) can treat property transferred to the trust in a defined period before US residency begins as though it were transferred on the day residency starts. The length of that look-back period is not stated here — confirm it for your own dates before relying on it | US status can change with no change to the trust, and with no transfer in the year itself |

Is the "both yes" trust actually aligned?

Only on income. UK income tax falls on the settlor, with the trustees paying as they receive the income and the settlor reporting that tax on their own Self Assessment return. Section 646 gives the settlor a right to recover tax on that income from the trustees.

Gains work differently. The old rule attributing a UK-resident trust's gains to its settlor, section 77 of the 1992 Act, was omitted from 2008, and gov.uk says trustees "usually" pay capital gains tax on trust disposals. The US takes a different view. Under Treasury Regulation §1.671-3 the owner of a grantor trust takes into account every item "including capital gains and losses". So the same gain can be taxed on the trustees in the UK and on the settlor in the US, in different hands.

That is an identity mismatch, and it is where a foreign tax credit can fail if nobody plans for it.

A worked example

Take a hypothetical — not a client, and the amounts are round numbers chosen to show the mechanism. Call her Hannah: a US citizen resident in London who settles investments on a UK-resident trust under which she and her husband may benefit. Illustrative only, in sterling, for a single tax year.

| Item | Amount | UK: who is charged | US: who reports it |

|---|---|---|---|

| Dividends and interest | 20,000 | Hannah, via the trust income rules | Hannah, as owner |

| Gain on selling shares | 50,000 | The trustees | Hannah, as owner |

On the income, the UK tax and the US income sit with the same person, so a credit claim on Form 1116 starts from a clean position. On the gain, Hannah reports 50,000 on her US return, yet the UK tax on it was assessed on the trustees. Whether she can credit that tax is the question her adviser has to answer before the trustees sell, not after, and it needs the treaty paper discussed next.

What does the treaty say?

Article 24 of the 2001 convention contains no trust rule. The rule is in the Exchange of Notes dated 24 July 2001. Where an item derived through a trust is treated by each country as derived by different persons, one the settlor or grantor and the other a beneficiary, the beneficiary's tax is treated as paid by the settlor or grantor when working out relief. Treasury's Technical Explanation gives the US-grantor example directly: the US "would provide a credit to the U.S. grantor for the U.K. tax imposed upon the U.K. beneficiaries."

Read it closely, because the trust sentence speaks of a beneficiary. It does not name trustees. The neighbouring sentence in the same Note deals with tax paid by a fiscally transparent "entity", and Treasury lists grantor trusts as fiscally transparent, so that is the natural place to look for trustee-level tax. Have the position reviewed before relying on it for a large gain. Note also that the treaty's transparency rule does not displace the saving clause, so it never stops the US taxing its own citizen.

What must be filed?

US filing follows US status, not the UK label. The Form 3520-A instructions say "A foreign trust with a U.S. owner must file Form 3520-A", and each US owner is responsible for ensuring it does. If the trustees do not file, the owner files a substitute with Form 3520. UK trustees rarely know this. A confidentiality clause in the deed does not help: the instructions state that such provisions are "not reasonable cause".

The practical checklist for any UK trust with a US connection:

1. Identify every settlor, including anyone who added property later, and their US status on each date.

2. List every person who could benefit under the deed, including through a power to add beneficiaries.

3. Run the UK test and the US test separately, and record both answers.

4. Split income and gains by who is charged in each country.

5. Confirm that Forms 3520 and 3520-A are in hand if the trust has a US owner, and see our guide to foreign trust reporting for US persons in the UK.

6. Review all of this again when anyone moves country, marries, separates or dies.

Distributions raise their own questions, covered in our piece on appointing capital from a UK trust to a US beneficiary. The mirror-image facts — a US trust with a UK-resident beneficiary — are in US trusts and UK resident beneficiaries. For the family as a whole, the mapping usually sits inside wider US-UK private client tax planning, since the same deed drives inheritance tax and US estate questions too.

Where we fit

Mapping a deed against both statutes is the part families cannot easily buy twice. A UK adviser can tell you the trust is settlor-interested and a US preparer can tell you it is a grantor trust, and you will still not know whether those two answers describe the same trust or two different ones — because neither has read the other's statute against your deed.

We run both tests against the same document and record both answers, including the years in which they disagree. Every filing we prepare is reviewed and signed by a licensed professional — an IRS Enrolled Agent who is also ACCA-qualified — so one person holds both sides of the classification rather than two advisers corresponding through you. You can see what that costs or book a consultation.

This article is general information, not advice on any specific trust. Next Tax Source's US and UK work is reviewed by an IRS Enrolled Agent who is also ACCA-qualified.