Income received by beneficiaries to a Trust

This article serves to inform that income received by a beneficiary from a trust is subject to tax.

What is a trust?

Section 2 of the Income. Tax. Act. (Chapter 23:06). Defines a “trust instrument” as “a deed, will, contract of settlement or other disposition, including a verbal declaration, by which a trust is created.

Who is a beneficiary?

A beneficiary or beneficiary with a vested right is identified in Section 2 of the Income Tax Act as a person entitled to an immediate fixed right to enjoy the present or future benefits flowing from the trust income;

What is the beneficiary entitled to?

The beneficiary is entitled to an immediate fixed right to enjoy the present or future benefits flowing from the trust income, as stated in the Trust deed. For example: XYZ Foundation is a family trust.  The parents and three minor children are the beneficiaries.

The trust deed specifies that:

An immediate benefit may flow to the beneficiaries during the tax year,

The parents are entitled to 20 percent  of trust income annually,

Minor children are entitled to an immediate benefit in the form of school fees payments and upon reaching 18 years a future benefit of 5 percent of the trust income paid annually.

From the example above what are the tax implications for each beneficiary?

In terms of section 8 (1) of the Income Tax Act, any immediate receipts as well as 20 percent of annual trust Income received by the parents’ forms part of gross income for the year. The income is subject to 25 percent tax and 3 percent Aids Levy.

Minor children- the income of minors is taxed in the hands of the parents in the years that the minor receives it in terms of section 10(4) (b) of the Income Tax Act. The income will become taxable in the hands of the minor when they attain 18 years of age. Again the income is subject to 25 percent tax plus 3 percent aids levy.

How should this be done?

The beneficiaries   should be registered with Zimra as taxpayers and file annual tax returns in respect of the income received from the trust.

The parents should declare their receipts and that of the minor child(dren)

Disclaimer: This article was compiled by the Zimbabwe Revenue Authority for information purposes only. Zimra shall not accept responsibility for loss or damage arising from use of material in this article and no liability will attach to the Zimbabwe Revenue Authority. 

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