Mei Lim Cooper looks at some of the useful changes made by Finance (No. 2) Act 2023 to simplify the rules for trusts and estates. Most of the measures take effect from 6 April 2024.
The changes contained in s29 and Sch 2, Finance (No. 2) Act 2023 (F(No.2)A 2023) are aimed at simplifying administration for low-income trusts and estates, as explored in a previous government consultation on the subject. The measures are estimated to affect some 37,000 beneficiaries of trusts and estates each year.
We explore the changes taking effect from 6 April 2024 below.
Extension of de minimis limits for trusts and estates in general
Currently, by concession, trusts and estates do not have to pay income tax where the only income is savings interest and the tax liability is less than £100.
This concession has been extended and legislated for by para 10, Sch 2, F(No.2)A 2023 which inserts new s24B, Income Tax Act 2007. From 6 April 2024, the de minimis applies to all types of income that the trust or estate receives, including dividend income and rental income. Trusts and estates receiving income of £500 or less in total will not have to file a return and the tax liability of trustees and personal representatives will be taken to be nil.
Trusts and estates receiving income of £500 or less in total will not have to file a return
Where income from all sources exceeds £500, the whole of that income will be subject to income tax.
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Estates and their beneficiaries
As stated above, for 2024/25 onwards, estates in administration that receive income of £500 or less during a tax year will no longer have to file a tax return, nor pay any tax to HMRC in relation to that year. In addition, a beneficiary of an estate receiving income that falls beneath the de minimis limits will not be charged to tax on that income (para 11, Sch 2, F(No.2)A 2023).
For low-income estates, the rule changes do lead to a simplification, with many estates no longer needing to file a tax return or pay income tax. However, in the new era of higher interest rates and increasing rents, personal representatives will need to keep the estate’s income carefully under review from year to year.
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Trustees and trust beneficiaries
Again, from 6 April 2024, where income of £500 or less arises to a trust during a tax year, the trustees are treated as having a nil tax liability. However, the £500 de minimis amount is reduced where the settlor has settled multiple trusts. The de minimis amount is divided by the total number of settlements existing during the tax year, down to a minimum of £100 where there are five or more trusts. The following are excluded in calculating the total number of settlements: pension settlements, settlor-interested trusts, vulnerable beneficiary trusts and heritage maintenance settlements.
Unlike beneficiaries of low-income estates, trust beneficiaries remain subject to tax on trust income as a starting point
While this simplifies filing and payment of tax for trustees of low-income trusts, it may be a different situation for the beneficiaries of the trust. Unlike beneficiaries of low-income estates, trust beneficiaries remain subject to tax on trust income as a starting point.
Taking interest in possession trusts first, some beneficiaries will benefit from the changes. In particular, beneficiaries who have allowances available to cover any trust income that arises to them (eg, the personal allowance or the savings allowance) will no longer have to claim a repayment of basic rate tax paid by the trustees using a form R40.
Example 1: Farah |
Farah is the sole life tenant of an interest in possession trust. Along with her pension of £8,100 this is her only source of income.
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However, beneficiaries who are subject to tax at the basic rate of tax may need to pay the additional tax on a small amount of income. This will require them to file a self assessment tax return, perhaps for the first time, and pay an amount of tax to HMRC directly. The burden of administration is therefore passed from the trustee to the trust beneficiaries.
Depending on the number of trust beneficiaries, this may increase the administration required by taxpayers and HMRC.
Example 2 |
Graham, Hana and Ingrid are the joint beneficiaries of a life interest trust, with equal entitlement to income. They are all basic rate taxpayers in employment. Each has a small portfolio of shares, the dividends from which have been partially covered by the dividend allowance and any tax collected through an adjustment to their tax code.
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Removal of the £1,000 standard rate band
Turning to discretionary trusts, currently the first £1,000 of income received is taxed at the standard rates that apply to individuals (ie, 20% for non-dividend income and 8.75% for dividend income). Income in excess of this is taxed at the trust rate of 45% for non-dividend income and 39.35% for dividend income.
With the extension of the £500 de minimis, this £1,000 band will be removed from 6 April 2024 (para 13, Sch 2, F(No.2)A 2023).
Distributions to discretionary trust beneficiaries are treated as received net of 45% tax, and tax can be reclaimed through the beneficiary’s tax return if they are basic or higher rate taxpayers.
Where only small amounts of income are involved, this may lead to some complexity in calculating the adjustments for tax pooling purposes, as tax credits due to beneficiaries may regularly outweigh the tax paid by trustees.
Other changes
Aside from these changes, there are some smaller technical changes that took effect from 6 April 2023 (Pt 1, Sch 2, F(No.2)A 2023). These provisions seek to ensure that the tax credits and allowances for a beneficiary of an estate continue to operate correctly in light of the changes above.
Mei Lim Cooper, Technical Manager, Personal Tax, ICAEW
