News | June 25, 2024

New tax rules for low-income trusts

From 2016/17, HM Revenue & Customs (“HMRC“) have not required trustees or personal representatives (“PRs“) to report any income of a trust or estate which is solely savings interest and is less than £500. The trustees or PRs simply pay the gross interest to the beneficiaries who report it to HMRC as part of their own taxable income. In addition, trusts where no beneficiary has a right to income (generally, “discretionary trusts”) have been entitled to a £1,000 de minimis band whereby the first £1,000 slice of trust income is subject to income tax at the basic rate (20%) or the dividend ordinary rate (8.75%), rather than the Trust Rate of 45% (or 39.35% on dividends) (which applies thereafter).

From tax year 2024/5, however, these concessionary rules have been changed.

From 6 April 2024, trusts and estates with total income not exceeding £500 will not pay any income tax on that income or need to report it to HMRC. Where a settlor has a number of trusts, the £500 limit will be proportionately reduced by the total number of the current trusts to a minimum of £100. Interest in possession trusts, settlor-interested trusts, vulnerable beneficiary trusts and heritage maintenance trusts will not reduce the £500 limit.

Additionally, the £1,000 de minimis band for discretionary trusts has, from 6 April 2024, been abolished, meaning that the full income of discretionary trusts is taxable at the Trust Rate of 45%/ 39.35%.

These changes are beneficial for trusts with annual income under £500 as they further simplify the trust’s administration, and mean that such trusts will have no income tax to pay. Trusts with income in excess of £500 and discretionary trusts, however, will not experience such a positive impact and will pay more tax as a result.

The new rules will also initiate self-assessment for offshore discretionary trusts in receipt of UK dividend income as non-resident trustees are entitled to notional basic rate tax credit which is less than the charge on dividend income at the Trust Rate.

These changes should not, however, discourage a potential settlor from gifting assets to a trust or giving an inheritance to their spouse, children or grandchildren. In many situations, trusts remain a safer and more practical alternative than an outright gift, especially where the intended beneficiary is young and/ or not mature enough to manage assets of considerable value.

For advice on these new tax rules for low-income trusts, or on the set up or administration of trusts, please contact your usual Wedlake Bell adviser.