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What is the trust income tax rate for 2023/24? | Trusts and Income Tax

What is the trust income tax rate for 2023/24? | Trusts and Income Tax

Mike Wakeford

What is a trust?
A trust is created when assets, usually referred to as the trust property, are placed under the control of a trustee for the benefit of another, usually referred to as the beneficiary. The person transferring assets to the trust is known as the settlor.

There are a number of different types of trust that can be created, but the main two types are discretionary trusts, where trustees have the discretion over to whom and when they distribute income from the trust, and interest in possession trusts, where the income beneficiary, otherwise known as the life tenant, has a direct interest to any income that is generated from the trust property, as it arises.

The trustees are responsible for managing the trust, to include all administrative duties like reporting and paying any tax liabilities on behalf of the trust, as well as the day-to-day management of the trust assets.
All express trusts must be registered on the Trust Registration Service, regardless of whether they pay tax, and it is also the trustees’ responsibility to keep the register up to date.

Discretionary trusts
The trustees are responsible for paying out of trust assets income tax on any income received by the discretionary trust.

The first £1,000, known as the standard rate band, taxes income at the basic rate of tax (20% for non-dividend income and 8.75% for dividend income). Any income in excess of the £1,000 standard rate band is taxed at the trust rate, which is 45% for non-dividend income and 39.35% for dividend income.

Note that the standard rate band is set to be removed from 6 April 2024 so that all income will be taxed at the trust rate going forwards.

This income is reportable on a trust tax return and must be filed by 31 January following the end of the tax year, with tax payable by the same date.

Interest in possession trusts
The trustees are still responsible for paying out of trust assets income tax on any income received by the trust, however, unlike discretionary trusts, the trustees only pay tax at the basic rate of tax for all income.
Where the trustees receive the income, before distributing it to the beneficiary, this is reportable on a trust tax return and the filing and payment date is the same as for discretionary trusts.

However, there are different reporting requirements if the income is paid directly to a beneficiary.
There are also different rules for other types of trust, like bare trusts and settlor-interested trusts. It is, therefore, important to seek advice as to what the tax implications and reporting requirements are for a trust, including Capital Gains Tax and Inheritance Tax implications.

It was announced in the Spring Budget 2023 that from 6 April 2024, any trust with income below £500 will have no reporting requirement or tax liability on this income. This £500 limit will be restricted if the settlor has created more than one trust.

Reporting a trust distribution
If you receive a trust distribution, as a beneficiary, it is important to confirm with the trustees if the distribution is a capital distribution or an income distribution.

If it is a capital distribution, this is not taxable on the beneficiary and so there is nothing for you to report.
If it is an income distribution, the amount you receive will be treated as net income (income that has had tax deducted at source) and must be reported to H M Revenue and Customs (HMRC).

The trustees should issue you with an R185 form, which details the distribution you received, together with the corresponding tax that is treated as paid on that distribution.

If you receive income from an interest in possession trust, this income keeps its nature (interest, dividends etc.) and will be taxed at your marginal rate of tax on that type of income, being 20%/40%/45% for non-dividend income and 8.75%/33.75%/38.1% for dividends.

Any income received from a discretionary trust will be treated as ‘trust income’ on your return and taxed at your non-dividend income marginal rate of 20%/40%/45%. Discretionary income distributions always have a 45% tax credit attached to them and so, if you are not an additional rate taxpayer, you can reclaim some tax on this distribution.

While this income is reportable, HMRC’s systems are not compatible with reporting trust income and, therefore, you are not able to file a tax return online, using HMRC’s system. You will either need to submit a paper tax return, which must be filed by 31 October following the end of the tax year you receive the distribution in, or your return will need to be submitted using 3rd party software, which does support the reporting of trust income on a self-assessment tax return. The deadline for filing online is 31 January following the end of the tax year.

Contact Us
If you need assistance with the tax implications of a trust and your reporting requirements, contact Moore (South) today. Our specialist tax team will help you to remain compliant with your trust income. For more information, contact us today.