Trust tax changes – Spring Budget 2023

What are the implications of these changes?

Offshore Trusts coming into charge

When non-residents, including trustees, receive UK dividends they are treated as having paid Income Tax at the basic rate. Therefore, discretionary offshore trusts which receive UK dividends as their only source of UK income, within the standard rate band, have no tax liability or UK reporting requirement. 

On removal of the standard rate band, discretionary offshore trusts will have a reporting requirement and a tax liability on receipt of UK dividend income, as the basic rate tax credit is less than the charge under the rates applicable to trusts. There will still be no reporting requirement if the income is less than the low income exemption.

Trusts removed from reporting requirements

Currently, UK trusts with low levels of income, but not solely savings income, must file tax returns and pay tax. However, from 6 April 2024, provided the income is below the low income exemption, there will be no filing requirement or corresponding tax liability. 

Estates removed from reporting requirements

Similarly, personal representatives of estates may also benefit from the low income exemption.

Currently, if estates meet certain conditions, the personal representatives can file an informal tax return but there is still a reporting requirement. This can lead to professional fees being incurred despite the estate receiving minimal income and having little to no tax liability.

From 6 April 2024, if the low income exemption is met, no return will be required and the income can be distributed free of UK tax. 

Click here for more information on the informal estate procedure.

How do these changes impact beneficiaries of trusts and estates?

With the new low income exemption, there will no longer be a tax credit attaching to the income of beneficiaries of interest in possession or settlor interested trusts where income is below the threshold. Therefore, non-tax paying beneficiaries will no longer have to make a repayment claim to receive the gross amount. Alternatively, if you are a tax paying beneficiary you will no longer receive a corresponding tax credit due to no tax having been paid.

If you are the beneficiary of an estate and receive income that fell below the low income exemption, you will not need to report this and will be exempt from suffering tax on this income. 

How we can help

The new legislation will affect which trusts and estates need to file UK tax returns. If you’re a trustee and have been brought within reporting requirements, it’s important you realise this and meet your obligations to avoid facing penalties and interest. We can help identify any new requirements and complete the compliance work for you.

Alternatively, if you believe a trust or an estate you act for will be falling out of UK reporting requirements, we’re able to provide advice on planning for this and ensure HMRC do not issue further tax returns.