BN35 - Modernising the Tax System for Trusts

Who is likely to be affected?

  1. Trustees, beneficiaries and settlors of settlements.

General description of the measure

  1. A package of changes to modernise the tax system for trusts, in particular by increasing the standard rate band for trustees who pay tax at the special rates applicable to trusts, and bringing the main trust-related definitions and tests for tax on income and chargeable gains into line with each other. These measures follow the introduction in Budget 2005 of the standard rate band and a new tax regime for certain trusts with vulnerable beneficiaries.

Operative date

  1. The changes will take effect from 6 April 2006, with the exception of the harmonised residence test for trustees, which will take effect from 6 April 2007.

Current law and proposed revisions

  1. At present, the approaches to taxing trustees for the purposes of the Income Tax Acts and the Taxation of Chargeable Gains Act 1992 (TCGA) are quite different. For example, unlike the TCGA, the Income Tax Acts contain no definition of "settled property". And the differences between the rules for tax on income and chargeable gains can result in trustees being non-UK resident for income tax purposes but the trustees of the settlement being UK resident for the purposes of the TCGA, and vice versa. The new definitions and tests will end these unhelpful differences in treatment.
  2. The main changes introduced by the new measures are:
  • an increase of the standard rate band from £500 to £1,000
  • a common meaning of "settled property", leading to a common meaning of "settlement"
  • a common meaning of "settlor"
  • provision for the trustees of a settlement to be treated as a single person
  • a common test to determine whether the trustees of a settlement are resident in the United Kingdom
  • provision for the trustees of a settlement to elect that a sub-fund of the settlement be treated as a separate settlement in certain circumstances.
  1. All the above changes, with the exception of the increase in the standard rate band, are to apply for the purposes of the Income Tax Acts and the TCGA, subject to separate provision being made in certain circumstances (such as in provisions designed to counter tax avoidance).
  2. In addition, the following changes are being introduced:
  • the income of settlor-interested settlements is to be treated as though it had arisen directly to the settlor
  • a measure to legislate the existing practice of not taxing beneficiaries who receive discretionary income payments from the trustees of settlor-interested trusts; and
  • modifications to some of the provisions in the TCGA which determine whether a person who is a settlor in relation to a settlement has an interest in the settlement, so that account is taken of dependent minor children.

Some of the proposed changes included in the consultation exercise, such as income streaming and changes to the way estates in administration are charged to capital gains tax, are not being taken forward at this time.

Further advice

  1. If you have any questions about these changes, please contact Roger Willoughby on 0131 777 4143 or Rachel Salisbury on 020 7147 2761.