Chancellor Hunt announced in his Spring Budget there are to be changes to the taxation of low income generating discretionary trusts. The measure’s main changes will have effect for tax years 2024-25 onwards, though the technical amendments to ensure an estate beneficiary’s tax credit and savings allowance continue to operate correctly will have effect for tax year 2023-24 onwards.
Legislation will be introduced in Spring Finance Bill 2023 stating that where the “net income” of trustees or personal representatives is £500 or less it is treated as being £0. Where net income exceeds £500, there is no change. This announcement provides that trusts and estates with income up to £500 do not pay tax on that income as it arises. It also removes the default basic rate and dividend ordinary rate of tax that applies to the first £1,000 slice of discretionary trust income and provides that beneficiaries of UK estates do not pay tax on income distributed to them that was within the £500 limit for the personal representatives. It also makes technical amendments to ensure for beneficiaries of estates that their tax credits and savings allowance continue to operate correctly
Much like how the current standard rate band works, where a settlor has a number of current trusts, this £500 limit will be split for accumulation and discretionary trusts, so if the settlor has created up to 5 settlements or more then this will be limited to £100. To make this rule fairer and simpler to apply, interest in possession trusts, settlor-interested trusts, vulnerable beneficiary trusts and heritage maintenance trusts will not be taken into account.
For beneficiaries of interest in possession trusts and settlors of settlor-interested trusts, there will no longer be a tax credit attached to trust income where the trust is not taxed because of the new £500 limit. For non-taxpayers this will remove the need to make tax repayment claims. For other taxpayers there will be an additional amount to pay and tax returns may need to be made when that was not previously the case.
This measure is expected to affect an estimated 37,000 individuals each year who are beneficiaries of trusts or estate meaning these client will save on time and costs in having to either report or reclaim tax paid.
Andrew Tully, Technical Director at Canada Life said:
“There are winners and losers from this policy change. This will simplify the system for a small number of beneficiaries, personal representatives, and trustees where the net income is below £500 per year. Those with higher incomes will pay more and the treasury from its own cost projections expects to raise £30 million from this one change over the next five years.”
