REV BN 21: Modernising the Tax System for Trusts
Who is likely to be affected?1. Trustees, beneficiaries and settlors of trusts. General description of the measure2. A package of measures to modernise the tax system for trusts; to simplify the regime for a large number of trusts, particularly those with relatively small amounts of income, and to bring the tax paid by trusts for the most vulnerable beneficiaries more in line with what it would have been had the beneficiaries held their assets directly. Operative date3. From 6 April 2005, though certain measures designed to protect trusts for the vulnerable will be backdated to 6 April 2004. Current law and proposed revisions4. Under the current regime, many trusts are taxed at the rate applicable to trusts, a compromise rate designed to reflect the fact trusts have a variety of beneficiaries, some of whom are taxable at the higher rate of tax and others who are taxable at lower rates or may be non-taxpayers. The effect of this compromise is that an individual beneficiary’s tax bill will almost always be different depending on whether assets are held directly or via a trust. 5. The Chancellor announced in the Pre-Budget Report that the rate applicable to trusts would increase from 34% to 40%, and the dividend trust rate from 25% to 32.5%. It was also announced that the Inland Revenue would be consulting with interested parties on a series of measures to modernise the Income Tax (IT) and Capital Gains Tax (CGT) system for trusts. 6. Four discussion papers were issued in December 2003, and these were followed by a series of meetings with representative bodies and other interested parties in January and February 2004. A large number of written representations and suggestions were also received. A full summary of the responses will be published later in March 2004. The main features of the modernised tax system for trusts will be: Basic rate band7. There will be a basic rate band applying to the first £500 of income for all trusts liable at the rate applicable to trusts. 8. Trusts which receive all their income up to the basic rate band either net of tax or with an associated tax credit will have no further tax to pay. Those which receive their income gross will have to pay tax at the basic or lower rate depending on the nature of the income. 9. This measure will take around 30,000 of the smallest trusts out of the full Self-Assessment system. To ensure that these trusts still comply with their obligations we will issue returns to them every few years. The basic rate band will apply to all trusts not just those with income below £500. Trusts for the vulnerable10. There will be a new tax regime for trusts for the most vulnerable, allowing these trusts to be taxed on the basis of the vulnerable beneficiary’s individual circumstances for both IT and CGT. 11. Trustees will be able to use the individual beneficiary’s personal allowances, starting and basic rate bands, rather than being taxed at the rate applicable to trusts. 12. Exactly which trusts will be eligible for this new regime has yet to be decided but Ministers have indicated it will include trusts for the disabled and orphaned minor children. Definitions and tests13. A set of common definitions and tests will be introduced for IT and CGT. The aim is to improve consistency and make it easier for all trustees, especially lay trustees, to correctly determine their tax status and treatment. Trust Management Expenses14. We will be seeking to work with the main representative bodies to develop better guidance on the correct treatment of trust management expenses under the law as it presently stands. Other issues15. A number of other issues discussed during the consultation, such as streaming income and gains through a trust and the taxation of chargeable gains when received by estates in administration are still under consideration. Summary16. Further work will be carried out over the summer to refine all the proposals, with the aim of publishing draft legislation at the time of the 2004 Pre-Budget Report. Further advice17. If you have any questions about this change, please contact Roger Willoughby on 0131 777 4143 or Mark Hayward on 020 7438 4402.
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