Charitable Trust Tax Obligations Explained: Do They Pay Taxes?

When you hear the word "trust" you might picture a wealthy family protecting assets, but a Charitable Trust is a legal vehicle created solely to support a public benefit. The big question that pops up for founders, trustees, and donors alike is: do charitable trusts pay taxes? The short answer is “yes and no” - it depends on the type of income, the activity in question, and how the trust is structured.

What Exactly Is a Charitable Trust?

A charitable trust is a non‑profit arrangement where assets are held by trustees for a defined charitable purpose - education, relief of poverty, health, religion, or any other purpose recognized under UK law. Unlike a charitable company, the trust does not have shareholders; its governing document (the trust deed) outlines the mission, beneficiaries, and the powers of the trustees.

Under the Charities Act 2011, the trust must register with HM Revenue & Customs (HMRC) to claim tax‑exempt status. Once registered, the trust enjoys a range of tax reliefs, but these are not blanket immunities.

Why Charitable Trusts Are Usually Tax‑Exempt

HMRC treats genuine charities as benefiting the public, so most of their core activities are exempt from direct taxation. The key exemptions are:

• Income Tax on income generated from activities that directly further the charitable purpose.
• Capital Gains Tax on the disposal of assets used for charitable work.
• Inheritance Tax relief on donations made to the trust.
• VAT relief on certain supplies, such as goods purchased for charitable events.

If a trust sticks to these rules, it pays zero corporation or income tax on its charitable income.

When Tax Does Kick In

Not every pound that lands in the trust’s bank account is tax‑free. The tax liability falls into three broad buckets:

1. Non‑charitable trading income - profits from a business that is not directly linked to the charitable purpose (e.g., a café run by the trust but open to the public without any charitable tie‑in).
2. Investment income that is not used for charity - interest, dividends, or rent that is simply saved or invested without being spent on the mission.
3. VAT on taxable supplies - if the trust sells goods or services that are not exempt, ordinary VAT rules apply.

These streams are subject to the usual UK tax rates. For example, non‑charitable trading profit is charged at the standard corporation tax rate (currently 25% for large profits, 19% for small profits). Investment income that is not spent on the charitable purpose may be subject to income tax at the personal rates of the trustees if the trust is deemed a “non‑charitable purpose” for that income.

Key Tax Types Explained

Understanding which line a pound falls on is the first step to staying compliant.

Reporting Requirements - What Trustees Must Do

Even with tax‑exempt status, the trust cannot ignore paperwork. The core reporting duties are:

• Annual Return to the Charity Commission - a public record of income, expenditure, and activities.
• Annual Tax Return (CT600) to HMRC - required if the trust has any taxable income.
• Gift Aid Reconciliation - ensuring donors’ contributions are claimed correctly.
• VAT Returns - for any VAT‑registered activities.

Failing to file on time can trigger penalties, suspension of tax reliefs, or even removal from the register.

Common Pitfalls and How to Avoid Them

Many new trusts stumble over the same issues. Here are the top three and practical fixes:

1. Mixing charitable and non‑charitable trading - Keep a separate bank account for any commercial venture and file a distinct CT600 for that activity.
2. Reinvesting surplus without a charitable purpose - Any retained earnings must be earmarked for a charitable objective; otherwise, they become taxable.
3. Ignoring VAT thresholds - If taxable turnover exceeds £85,000, you must register for VAT, even if most activities are exempt.

Good governance means documenting decisions, setting clear policies, and consulting a tax adviser when you’re unsure.

How to Keep Your Trust Tax‑Compliant - A Quick Checklist

• Register with the Charity Commission and HMRC before receiving donations.
• Identify every source of income and classify it as charitable or non‑charitable.
• Maintain separate accounts for trading activities that are not exempt.
• Submit the annual charity return and, if needed, a CT600 for taxable profit.
• Claim Gift Aid where possible and keep donor consent records.
• Register for VAT if taxable turnover exceeds the statutory threshold.
• Review the trust deed annually to ensure activities stay within the charitable purpose.

Real‑World Example: The Riverside Food Bank Trust

Riverside started in 2018 as a small food‑bank trust in Bristol. All donations were used to buy food for vulnerable families, meaning the income was exempt. In 2022 the trust opened a café to generate extra cash for a new refrigeration unit. The café sold coffee to anyone passing by - a clear non‑charitable trading activity. Riverside set up a separate trading subsidiary, filed a CT600, and paid corporation tax on the café profits. The charitable arm remained tax‑free because the profit was channelled back into the food‑bank mission.

By keeping the two streams distinct, Riverside avoided a costly HMRC investigation and kept its charitable status intact.

Bottom Line - Do Charitable Trusts Pay Taxes?

The answer is nuanced: the core charitable income is exempt, but any income that isn’t directly tied to the charitable purpose - such as unrelated trading profit, investment returns not spent on the mission, or VAT on taxable supplies - is subject to the usual UK tax rules. The key for trustees is to separate, record, and report each income stream properly.

Frequently Asked Questions