Starting from 6 April 2024, a new £500 income exemption will be introduced, affecting numerous trusts. This change introduces several complexities, particularly because income falling within the £500 exemption range will remain subject to taxation when distributed to beneficiaries.
The exemption operates on a strict threshold principle. For example, a trust earning £501 in income will be taxed on the entire amount, not merely on the £1 exceeding the £500 limit. Adding to the complexity is the provision that the £500 exemption may need to be divided among multiple trusts established by the same individual.
Initially, the £500 exemption seemed quite favourable for savings income when the bank rate was a modest 0.75%. Now, with the bank rate significantly higher at 5.25%, the exemption’s value appears diminished.
Interest in possession (IIP) trusts
IIP trusts pay income tax at 20%, except for dividend income which is taxed at 8.75%. The £500 exemption will mean that smaller IIP trusts no longer have to file returns or pay tax, but this income will now be received gross by beneficiaries without any associated tax credit.
This is good news for non-tax paying beneficiaries as they will no longer need to make repayment claims. However, basic rate taxpayers will now have to account for tax on trust income, a liability previously met by the tax credit.
There will be no change for either the trust or the beneficiaries where trust income exceeds £500.
Discretionary trusts
Discretionary trusts pay tax at 45%, except for dividend income which is at 39.35% – the same rates paid by an additional rate individual taxpayer. Previously, there was a £1,000 standard rate band on which lower rates applied.
The £500 income exemption has replaced the standard rate band.
The complication for discretionary trusts is that any distributions to beneficiaries carry a 45% tax credit, even if the exemption applies. Therefore, the trust will still have to pay sufficient tax to cover the tax credit, which can mean complex calculations.
The beneficiaries of discretionary trusts will not see any change to their tax treatment given that trust income will continue to have a 45% tax credit attached.
For more information, contact our Yorkshire and Derbyshire based Accounting & Business Advisory can assist on 0114 266 4432 or info@smh.group
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