REV BN 20: The Rate Applicable to Trusts

Who is likely to be affected?

1. Trustees receiving income or realising capital gains and personal representatives administering an estate that realise capital gains.

General description of the measure

2. Pre Budget Report announced that the tax rate applicable to trusts (RAT) is to increase from 34% to 40% and the corresponding dividend trust rate from 25% to 32.5% with effect from 6 April 2004.

3. People who receive income from trusts will still be able to reclaim any excess tax paid by the trustees on their behalf and those liable at higher rates will still get credit for tax paid by the trustees.

4. There is also an amendment to section 677 of the Income and Corporation Taxes Act 1988 which charges tax on loans or other capital sums made by trustees to the settlor of a trust (that is the person who put funds into the trust) or their spouse.

5. It was also announced at the Pre-Budget Report that proposals for modernising the tax system for trusts were being put forward for discussion and the outcome of those discussions are covered in Budget Note REV BN 21.

Operative date

6. 6 April 2004.

Current law and proposed revisions

7. The rate applicable to trusts (RAT) is a rate that applies principally to the income and gains of trusts where the trustees can accumulate income and/or pay it out to the beneficiaries at their discretion. Specifically it applies to:

• the income of discretionary and accumulation trusts other than dividend income;
• the capital gains of all trusts and estates of deceased persons in administration; and
• certain amounts received by all trusts, for example gains from offshore funds.

At present this rate is 34% and is increasing to 40%.

8. There is also a separate trust tax rate of 25% that applies to dividends and similar income received by trusts that is linked to the RAT. This is increasing to 32.5%

9. Loans or other capital payments made by the trustees of a settlement to the settlor or their spouse are treated as the income of the settlor on which the trustees may have paid tax. The change to section 677 Income and Corporation Taxes Act 1988 ensures the settlor is not given credit for more tax than the trustees have actually paid.

Further advice

10. If you have any questions about this change, please contact IR Trusts on 0115 911 6500.

www.inlandrevenue.gov.uk