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    Changes to income tax charges for trusts and estates now in force

    The 2023 Spring Budget introduced changes affecting the way trusts and estates are charged to income tax – and they came into force last month, effective from 6 April 2024.

    In our latest blog, tax partner, Wendy Anderson, explains what these changes mean…

    What are the changes?

    Trusts and estates with income of £500 or under, from interest, dividends or rent, will not have to file a return from 2024/25 onwards. The tax liability of trustees and personal representatives in such cases will be considered nil.

    For trusts and estates with incomes exceeding £500 from all sources, the entire income will be subject to taxation at the ‘basic rate’ in the case of an estate, or at the ‘rate applicable to trusts’ for trustees.

    The £500 limit is reduced proportionally where a settlor has established more than one trust to a minimum of £100 per trust, but this excludes interest in possession trusts, settlor interested trusts, vulnerable beneficiary trusts and heritage maintenance trusts.

    This reform supersedes the previous concession for estates which meant that if the sole income was interest, and the tax due totalled less than £100 (i.e. less than £500 of interest income per year), then no tax was reportable or payable. The ‘starting rate band’ for trusts, allowing the initial £1,000 of trust income to be taxed at basic rates rather than the rate applicable to trusts, will also be abolished.

    Beneficiaries of an estate are also affected by the recent changes where the income is below the £500 limit. In this case, the ‘net income’ of a UK estate is treated as £nil and therefore is not chargeable in the hands of the beneficiary when distributed from the estate.

    However, it’s important to note that for trusts, the exemption does not override or replace the tax credit and tax pool charge associated with discretionary income distributions. Trustees will therefore still need to pay sufficient tax to frank an income distribution (currently 45%).

    Are there any other changes on the horizon?

    HMRC have hinted at their intention to make changes to Inheritance Tax (IHT) regulations to remove non-taxpaying trusts from reporting requirements. If this was to go ahead, it would be a welcome change for many trusts that, despite there being no IHT due on an exit or 10 year anniversary, are still required to submit a return because the value of their assets exceeds 80% of the available nil rate band.

    However, we haven’t heard any further detail on these proposals, and with rumours of IHT being scrapped altogether, it may mean these changes are not implemented.

    We will keep you updated as and when further information is provided by HMRC.

    Get in touch

    If you are concerned about the changes to income tax charges for trusts and estates or would like to speak about your personal circumstances in more detail, please contact Wendy Anderson by clicking the button below.

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