New dividend taxation rules: what trustees should be doing


Author: Helena Luckhurst


This article is taken from Helena Luckhurst’s blog The Wealth Lawyer UK

The taxation of dividends is set to change in the new UK tax year beginning 6 April 2016. The 10% dividend tax credit will go, replaced by a new £5,000 dividend allowance that permits the first £5,000 of an individual’s dividend income to be taxed at 0%. Dividends will still sit as the top slice of the individual’s income, so if the dividend would otherwise be taxed at the higher or additional rate of Income Tax (IT) but for the dividend allowance, the allowance gives the individual 32.5% or 38.1% tax relief. Individuals with significant dividend income have little to cheer about, though, as the allowance is paltry. Much less has been written about the effect that all this has on trustees, who are not taxed as individuals for IT purposes. How are trustees going to fare and what planning steps should they be considering?

Trustees of non-settlor interested trusts are taxed on dividends in one of two ways. If they run an interest in possession trust (IIP), the dividend tax treatment is relatively benign. They pay IT on dividends at the ordinary rate of 10% and currently there is no further tax to pay, as that 10% is satisfied by the 10% tax credit on dividends. However, with the new rules, an IIP will pay 7.5% IT with no tax credit. Trustees of all other types of trust pay tax of 37.5% on dividends (the dividend trust rate) but 10% of that is covered by the tax credit. From 6 April 2016, they will pay 38.1% without any tax credit.

It appears that trustees won’t get the new £5,000 tax free dividend allowance either, as the draft Finance Bill 2016 states that the allowance applies to individuals only. Trustees are not individuals for the purposes of IT.

Without a tax credit and a tax allowance, all trustees are going to be paying more tax on their dividends. What can trustees do? They might consider skewing the investment policy of the trust more towards capital growth – if the terms of the trust permit. Perhaps a change of investments might be appropriate? Allowing dividends to roll up within the wrapper of a single premium bond, for example. But if a change of investment strategy is not possible for tax or other reasons, consider the following:

  • IIP trustees can ensure that they distribute more of their dividend income to beneficiaries who have a spare dividend tax allowance. If IIPs mandate dividend income to the life tenant, the life tenant can report it on his tax return and apply his own dividend tax allowance – the trustees will have no IT to pay but also no income with which to pay management expenses.
  • If the trust is not an IIP, make it one! It may be possible to revocably appoint the trust’s investment portfolio onto IIP trusts if the trustees don’t mind fixing to whom the trust income should be paid, rather than having the discretion to regularly chop and change. This will secure an IT treatment on the appointment fund akin to an actual IIP trust. Don’t forget that the trust will remain non-IIP for all other taxes though.
  • Accelerate dividend payments into the current tax year if that would be beneficial and if the trustees have that level of control.

Beneficiaries of non-IIP trusts who receive income distributions from the trust will not be able to apply their dividend allowance against those payments because the trust is treated as a new source of income: it is not possible to look behind the trust curtain and see what type of income the payment is actually made of. These payments come with a tax credit of 45%, some or all of which could be reclaimed by the beneficiary, depending on the type of taxpayer (basic, higher etc.) that he is.

Helena Luckhurst, Partner, Fladgate LLP (hluckhurst@fladgate.com)

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