Low income trusts and estates
From 6 April 2024, all trusts and estates with any type of income up to £500 won’t require a tax return. If income exceeds this amount a return will be required on all income (not just any amount over the £500 threshold).
However, if you have settled more than one trust, the £500 limited will be apportioned across each settlement, to a maximum reduction of £100 per trust. For example, if you have settled 4 trusts, the threshold for formally reporting income would be £125 per trust.
Beneficiaries of UK estates will no longer pay tax on income distributions from the estate if the total estate income is below £500.
How will this affect me?
For low-income trusts and estates, it’ll mean that the dispensation of reporting requirements results in less administration work and costs. However, if any of the discretionary income is distributed, it’ll be treated as though it’s been paid net of tax, and the tax will be treated as paid at the trust tax rate of 45%. Therefore, a calculation of the tax payable on any income distributed will still be required to ensure the tax credit has been funded.
Capital Gains Tax (CGT)
The CGT allowance for trusts was reduced in the 2023/24 year from £6,150 to £3,000. This has now been further reduced to £1,500 for the 24/25 tax year.
As above, if you’ve settled more than one trust, this allowance will be apportioned across each settlement, subject to a maximum reduction of £300 per trust.
Since 6 April 2024, the tax rate for gains on residential property has reduced to 24% (this was previously 28%).
How will this affect me?
It would be sensible to consult with your investment managers, who will no doubt be aware of the changes, to ensure the very limited allowance will not trigger high CGT liabilities. It may also be worth conducting a general review of your trust assets, especially if the assets include residential property that could be subject to large gains in disposal and may therefore benefit from the reduced tax rate.
The standard rate band
Previously accumulation and maintenance of discretionary trusts benefitted from a standard rate band of tax, which meant that the first £1,000 of discretionary income was taxed at basic rate (20% on non-dividend income and 8.75% on dividend income).
However, the standard rate band has now been abolished and all income is now taxed at the rate applicable to trusts:
- 39.35% for dividend income
- 45% for all other income
How will this affect me?
This particularly effects low-income trusts (where income is above £500 and therefore reporting requirements will still be in place), as now all income will be taxed at the trust rate of 45%-39.75%.
Previously a trust that received non-dividend income of £900 would have had a tax liability of £180 as the total value of income fell within the standard rate band. Under the present rules, the tax liability will be £405, as the whole amount will be taxed at a rate of 45%.
Trust Registration Service (TRS)
It’s somewhat old news now that virtually all express trusts need to be registered and thereafter trustees have a duty to ensure that records are kept up to date. There was, however, not as much guidance on the repercussions of failing to register a trust.
HMRC have now introduced a fixed penalty of £5,000 where registration or updates have been deliberately avoided. The deadline for reporting remains the same: you must register a trust within 90 days of creation and any changes to the trust must also be updated to the TRS within 90 days of the change.
Financial institutions who are in a business relationship with trustees are required to request proof of registration of a trust. This is a document that can be downloaded from the TRS portal via the trust’s government gateway account. If the information in the proof of registration document doesn’t match their records, the organisation is required to make enquires with the trustees in order to agree the information. If agreement cannot be reached, the organisation is required to report discrepancies to HMRC.
Another reporting requirement to note is that further information is now needed for classes of beneficiaries. Previously if the trust deed included classes of beneficiaries, as opposed to specifically naming individuals, only the description needed to be reported (ie my children). You’ll now have to provide details of any beneficiaries who can be identified with the class (ie all of the children will need to provide their details).
In the light of the above, it’s crucial to ensure that the TRS information is regularly reviewed, updated and checked. If you’re in any doubt about whether a trust has/needs to be registered or if any changes have/need to be recorded with the TRS, please do check in with us.
Register now
If you’d like to receive our regular trustee updates to ensure you are on top of changes to the taxation of trusts and other trust compliance – click here.
Read the latest edition of Private Affairs for updates in private wealth law.
Our content explained
Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.