We'd like to bring to your attention to the changes made to the taxation of trusts which came into effect on 6 April 2024, together with a summary of announcements made in the recent Budget.
If you have any queries about any of these changes, please get in touch with a member of the Mills & Reeve trust team, or your usual contact.
Income Tax
Abolition of the Standard Rate Band
Where trustees are responsible for paying tax on income, the first £1,000 is taxed at the standard rate, and anything over £1,000 is taxable at the rates applicable to trusts. From 6 April 2024 the Standard Rate Band was removed.
All trust income arising from a discretionary trust will be taxed at the following rates, which are unchanged from 2023/2024:
- Dividend income – 39.35%
- All other income – 45%
By way of reminder, interest in possession trusts pay income tax at the rates mentioned below (unchanged from 2023/2024):
- Dividend income – 8.75%
- All other income – 20%
Sometimes the trustees ‘mandate’ income to the beneficiary. This means it's paid directly to the beneficiary instead of being passed through the trustees.
If this happens, the beneficiary needs to include this directly on their personal Self Assessment tax return and pay tax on it where necessary.
Capital Gains Tax
Reduction in the annual exempt amount
An important change to note is that the annual exempt amount available to trustees has been reduced from £3,000 to £1,500. Any taxable capital gains that exceed the trust’s annual exempt amount are assessed at 20% (or 24% if the gain arises from the sale of residential property – please see below).
Please note that where a settlor has established multiple settlements, the annual exempt amount is split equally between each settlement.
Investment managers will no doubt be aware of the new annual allowance, so if you have any concerns as to how this change might impact on your trust’s investment portfolio please contact us or your investment manager.
Reduction in rate on residential property gains
In the Spring Budget, the Chancellor Jeremy Hunt announced that from 6 April 2024 the rate of capital gains tax on residential property gains is falling from 28% to 24%.
The Chancellor expressed the hope that the 4% reduction in the capital gains tax rate would incentivise sellers and stimulate the residential property market.
Furnished Holiday Lettings
The Furnished Holiday Lettings regime will be discontinued on 5 April 2025.
This abolition removes the current incentive (where location permits) for landlords to offer holiday lets rather than longer-term home rentals.
Trusts offering Furnished Holiday Lettings have been eligible in the past for tax favourable treatments such as the ability to claim capital allowances, interest deductions at the full marginal rate of tax, and capital gains tax on disposal of as low as 10%. These will be withdrawn, and there will also be an anti-forestalling rule put in place which will apply from the Budget date with the aim of preventing tax planning in anticipation of the rule change.
The removal of these tax advantages may lead some trustees to consider redeploying their capital into other types of property or investments.
GOV.UK One Login
You may have seen reference in the press to a process whereby the above replaces the existing Government Gateway as a means of accessing government services on the internet. As a reassurance, this shouldn't affect HMRC services for trustees until next year at the earliest. We'll provide updates in advance of further developments once HMRC have set out what any changes in the existing arrangements in this area may be.
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