REV BN 10: Modernising the Tax System for Trusts

Who is likely to be affected?

1. Trustees, beneficiaries and settlors of trusts.

General description of the measure

2. A package of measures to modernise the tax system for trusts. Two of these (a standard rate band for trustees who pay tax at the rate applicable to trusts and a new tax regime for certain trusts with vulnerable beneficiaries) are being introduced and a further discussion paper is being issued today to consider the details of a number of other simplifying proposals.

Operative date

3. The regime for certain trusts with vulnerable beneficiaries is backdated to 6 April 2004; the standard rate band comes into effect from 6 April 2005; and other measures are likely to be introduced from 6 April 2006.

Current law and proposed revisions

4. In his 2004 Budget, the Chancellor announced that the tax rate applicable to trusts (RAT) would be raised to 40% to combat tax avoidance. He also announced that there would be new measures to prevent this change increasing burdens on certain trusts that have vulnerable beneficiaries.

5. Two measures were announced - a new tax regime for certain trusts with vulnerable beneficiaries, and a standard rate band of £500 for all trusts paying tax at the rate applicable to trusts. Legislation giving full details of these measures will be published in the Finance Bill.

6. A number of other proposals were put forward at Budget 2004. These included a set of common definitions and tests for trusts, and the streaming of income through trusts. These measures will simplify the taxation of trusts and were widely supported during consultation last year. However, during subsequent consultation, respondents also raised a number of concerns about some of the
detailed aspects of the proposals. A summary of the findings of this consultation has been published today.

7. Therefore, the Inland Revenue will carry out further development work on these measures and a discussion paper has been published today. It is intended that draft legislation will be published for consultation later this year, prior to the measures being included in next year's Finance Bill.

Further advice

8. If you have any questions about this change, please contact Roger Willoughby on 0131 777 4143 or Doug Stoneham on 020 7147 2761. Information about Budget measures is available on the Inland Revenue website