Modernising the tax system for trusts

In his 2003 Pre-Budget Report, the Chancellor announced plans to modernise and simplify the income tax and capital gains tax system for trusts. This was followed by an announcement at Budget 2004 that two new measures would be introduced from 6 April 2005 -

  • a new standard rate band for all trusts that pay tax at the rate applicable to trusts
  • a new favourable regime for certain trusts with vulnerable beneficiaries (backdated to 6 April 2004)

The Chancellor confirmed the introduction of these measures in the 2005 Budget.

Details

In order to reduce the opportunities to use trusts for tax avoidance, the Government raised the special rates at which trusts are taxed from 6 April 2004. The rate applicable to trusts was raised from 34 per cent to 40 per cent and the Schedule F Trust rate was raised from 25 per cent to 32.5 per cent.

The Government recognised, though, that this could have an impact on smaller trusts, trusts with vulnerable beneficiaries and those trusts whose beneficiaries are not higher rate taxpayers, so have been consulting with interested parties to look at measures to reduce this impact. The Government has also recognised that trusts taxation is a very complex area, which can be challenging for non-professional and unrepresented trustees. Therefore, a number of measures to simplify the taxation of trusts have also been put forward.

A series of discussion papers were published in December 2003, which were followed by a consultation document in August 2004. These documents, together with analyses of the responses to them, can be found in the Publications section below.

Two measures are being introduced:

  • standard rate band of £500 for all trusts that pay tax at the rate applicable to trusts is being introduced from 6 April 2005. Below this level, trustees will pay tax at no more than the basic rate of income tax. Those trusts with income consistently below this level will no longer need to complete a Self Assessment tax return every year
  • new, favourable tax regime for certain trusts with vulnerable beneficiaries, which will be backdated to take effect from 6 April 2004. Certain trusts with vulnerable beneficiaries will be able to elect into this regime, and once in the regime, the trustees will be able to claim relief so that the overall tax bill is reduced to what it would have been if all trust income and gains had arisen directly to the beneficiary

Legislation for these measures is included in Finance Bill 2005.

A number of other measures have been put forward in the discussion and consultation papers. These include proposals to:

  • introduce income streaming for trustees
  • introduce harmonised definitions and tests for trusts taxation
  • allow sub-funds within a trust to be treated as separate entities for income tax and capital gains tax purposes

These proposals have been supported in principle during consultation. However, a number of concerns have been expressed about some of the more detailed aspects. As such, the Government has asked the Inland Revenue to discuss these points further with key stakeholders, prior to publishing draft legislation for consultation later in the year, with a view to legislating the changes in Finance Bill 2006.

A discussion document was issued on 16 March 2005 and can be found in the Publications section below.

These modernisation proposals are for family/personal types of trust, not unit trusts, Venture Capital Trusts or other specialised vehicles that, whilst called trusts, have their own separate taxing system or are taxed as corporations.

Publications

  • Discussion paper published on 16 March 2005
  • Regulatory Impact Assessment published on 16 March 2005

A consultation document was published on 13 August 2004 and feedback on this consultation was published on 16 March 2005.

A number of discussion documents were issued on 17 December 2003 and a feedback paper on these was subsequently published on 27 April 2004:

If you wish to comment on the proposals or have any questions about the discussion process, please contact:

Inland Revenue Trusts
Room G45
1 Parliament Street
London
SW1A 2BQ

E-mail Andrew Hayward

Fax 020 7147 2749.

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