Clients who have discretionary trusts in place are reminded that the advent of higher rates of tax since April 2010 may warrant a review of the trust structure.
Since April 2010, trustees of discretionary trusts have been subject to a 50 per cent tax rate on trust income which exceeds the trustees’ basic rate band (the dividend income rate has also increased from 32.5 per cent to 42.5 per cent).
Possible strategies include:
- Removal of the settlor as a potential beneficiary under the trust. Where the settlor is among the class of beneficiaries, the income is treated as if it were that of the settlor for tax purposes;
- Distribution of trust income to beneficiaries. The tax paid by the trustees is effectively paid on account of the beneficiaries, so making a distribution may lead to a repayment of tax to them; or
- Investing to maximise growth, not income. The trustees have an annual Capital Gains Tax (CGT) allowance of half of the individual amount. CGT is also levied at a lower rate (28 per cent) than Income Tax, so realising gains is generally more tax-efficient than having income.
