Trusts and the 50% rate
 There has been much discussion surrounding the introduction of the 50% rate of income tax from 6 April 2010 for individuals with taxable income in excess of £150,000. The additional rate on dividends will also be introduced at the same level of income at a rate of 42.5%.
What is possibly not realised by many is that the same rates will be applied to the income of many trusts from the same date but that there is no cushion of £150,000. All trust income will be taxed at 50% (42.5% for dividends). The current trust tax rates are 40% (32.5% for dividends).
The impact of this change will be felt by those trusts where the trustees decide each year whether or not they want to distribute the income of the trust and to whom they want to make distributions. These trusts are known as ‘discretionary trusts’. Such trusts will pay tax at 50% on all their income (42.5% for dividends).
When income is distributed to beneficiaries it forms part of their taxable income. However beneficiaries do receive a full 50% credit for the tax deducted by the trustees. So if a beneficiary was only a basic rate taxpayer in their own right they would be due a repayment of tax.
Example
The trustees of a discretionary settlement receive gross interest of £200. They will pay tax on that of £100. They decide to pay the balance of the income to a beneficiary who is a basic rate taxpayer. The beneficiary will be deemed to have received £200 of income on which £100 tax has been paid. The beneficiary is only liable to tax on the £200 at 20% which means they will be entitled to a tax refund of £60.
Where the trust decides not to distribute the income then the overall position will be that the trustees will suffer the 50% deduction and this will deplete the ongoing reserves of the trust.
Where the trustees are obliged by the terms of the trust to pay out the income each year to named beneficiaries (what is known as an interest in possession trust), the tax rate which trustees will pay is only the basic rate of 20% (10% on dividend income). The beneficiary will again obtain the benefit of the tax credits passed on by the trust but only at the 20% or 10% rates. For a basic rate taxpayer this will cover the liability but not create a refund.
Disclaimer - for information of users: This newsletter is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this newsletter can be accepted by the authors or the firm.
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