Trust Update – Tax-free savings income and trust tax returns from 2016/17

Tax Comments Off on Trust Update – Tax-free savings income and trust tax returns from 2016/17

The changes in the taxation of dividends along with the abolition of tax deduction at source on interest paid is likely to cause additional compliance work for trustees.

Neither the new dividend tax allowance nor the personal savings allowance will apply to trustees.

Trustees of income interest in possession trusts have previously not had any liability to income tax if the only income received is taxed at source – for example dividends and pre-6 April 2016 bank and building society interest.

Neither did trustees of non-income interest in possession trusts have any additional liability if they only received savings income taxed at source, which is less than the available first slice and they did not make discretionary income distributions.

For years HMRC had, in these circumstances, been both discouraging the annual issue of tax returns and agreeing to requests not to issue them every year, subject to the trustees notifying them if a liability to income or capital gains tax arose.

Therefore there could be thousands of trusts receiving dividends or interest previously taxed at source where there was no requirement to complete annual tax returns as they had no liability to income tax.

Dividend income can normally be mandated to be paid directly to an income interest in possession beneficiary rather than to the trustees. In this case it is anticipated that HMRC will agree to the 7.5% dividend ordinary rate liability being paid by the income interest in possession beneficiary rather than the trustees.

However, if a trust has more than one income interest in possession beneficiary unless separate funds together with designated investments are put in place for each beneficiary then mandating dividends or interest payments is unlikely to be possible.

Although any new income liabilities will not need to be paid until 31 January 2018, the requirement to notify chargeability (TMA 1970, s 7) should not be overlooked.

The new dividend regime and the changes to the interest taxation at source rules are therefore likely to result in additional compliance work for trustees and their advisers.

Only those with estate in administration where the only source of income is savings in trust and the tax liability is less than £100 will escape having to notify.

If you think you will be affected and would like more advice or assistance with the preparation of Returns please give Lynn Green or Sue Stephens a call.