Interesting News

Tax Planning For Trusts

From 6 April 2010, the tax rate applicable to trusts will become 50% with dividend income from discretionary trusts being taxed at 42.5%.

These rates will apply to all income above the maximum standard rate band of £1,000, where the trustees have the power to accumulate income or have discretion over its distribution.

Tracy Jenkins, Tax Director, said “In cases where the beneficiary who receives income will not be liable for the new 50% tax rate, they are able to reclaim the tax, although that is likely to be an added inconvenience, while for higher earners it will represent an additional tax cost. To help prepare for this, trustees may want to review who benefits from their trust ahead of next April, with a view to maximising payments to individuals who can recover the tax”.

It is also worth considering creating ‘revocable interests in possession’ in favour of beneficiaries, which would allow them an immediate right to income from the trust. The trustees’ liability would then be limited to basic rate which in many cases would mean they did not have to make any payments to HMRC, and the problem of the loss of notional tax credits from the trust’s tax ‘pool’ is removed.

Revocable interests no longer have any Inheritance Tax (IHT) implications, and there should also be no consequences for Capital Gains Tax (CGT).