Chancellor Jeremy Hunt announced the following changes to trust taxation in the government’s Spring Budget on 15 March 2023.
Trusts with low levels of income
With effect from 6 April 2024, it is intended that trusts with total net income of up to £500 per annum will have no reporting obligations to HM Revenue & Customs (“HMRC”) and will not need to pay tax on that income. The £500 limit is reduced, however, where a settlor has created more than one trust. The amount is the higher of £100 or £500 divided by the total number of trusts created by the settlor.
This change is intended to simplify the compliance matters of low-income trusts. This measure will also help reduce costs associated with trust administration.
Changes to £1,000 standard rate band
With effect from 6 April 2024, it is intended that the £1,000 income tax standard rate band for discretionary trusts will be removed which means savings or non-savings income previously taxable at the basic rate (8.75% for dividends and at 20% for all other income) will be taxable at the trust rates of 39.35% for dividends and at 45% for all other income.
This should not have too great an impact on the tax liabilities of a discretionary trust as income over £1,000 is already taxed at trust rates so the maximum increase in tax liability after 6 April 2024 as a result of this change will be £450.
Capital gains tax (“CGT”)
With effect from 6 April 2023, the CGT annual exempt amount (“AEA”) available to trustees has been reduced from £6,150 to £3,000 and is to be further reduced to £1,500 from 6 April 2024. For a trust set up by a settlor with multiple trusts, the AEA will be apportioned across each trust with a de minimis limit of one-fifth of the AEA per trust where there are five or more trusts in existence during the relevant tax year.
Where there are joint settlors, the AEA is apportioned as per the settlor with the higher number of trusts.
The phased reduction in the CGT AEA has significantly increased the importance of capital losses to reduce the CGT liability. The losses can be carried forward indefinitely to reduce future CGT liabilities.
Inheritance tax (“IHT”)
HMRC will make changes to IHT regulations during the year 2023/24 to remove some non-taxpaying trusts from IHT reporting requirements.
It is also intended that, with effect from 6 April 2024, IHT agricultural property relief (“APR”) and woodlands relief will be restricted to property located in the UK rather than also including property in the European Economic Area (“EEA”) and, in relation to APR, the Channel Islands and the Isle of Man.
Restriction of Charitable Relief
UK charitable tax relief has been withdrawn from 15 March 2023 for European Union (“EU”) and EEA charities or from April 2024 where the EU/ EAA charity had confirmed their UK tax relief status with HMRC on or before 15 March 2023.
As from the applicable date, an EU/ EEA charity that is a beneficiary of a UK trust will not be able to claim UK tax relief on distributions it receives from a trust; and trustees will not be able to claim the IHT charity exemption on distributions to EU/EEA charities that trigger the IHT exit charge. There is more information on this development, and that relating to APR and woodlands relief, in our article Brexit prompts withdrawal of tax relief for European charities and European agricultural land.