Incoming simplification measures from 6 April 2024 will impact low-income trusts and estates that are UK resident or have UK income.
Also, the abolition of the remittance basis from 6 April 2025 will have implications for trusts, such as non-domiciled individuals (non-doms) no longer being able to create trusts excluded from UK Inheritance Tax (IHT) (assuming that this date is not moved forward).
Non-doms should consider tax planning now in light of the array of incoming changes to the UK tax system (which may be altered by a future Government). Please get in contact for expert tax planning advice.
From 6 April 2024, trusts and estates will no longer need to report or pay tax on income within a new de minimis limit of up to £500 per tax year. This is an all-or-nothing limit (i.e. it will not apply where income exceeds £500), which will not rollover when unused. This limit applies to all forms of taxable income and replaces an exemption on low-level savings income. These simplification measures will also impact estate and non-discretionary trust beneficiary tax credits.
Both the previous reporting exemption where there was only savings interest with tax not exceeding £100 and the Standard Rate Band of up to £1,000 (for discretionary and accumulation trusts) will simultaneously be removed from 6 April 2024.
Non-resident trusts where their only UK income was dividends within the Starting Rate Band will now have to report and pay tax on these dividends if they exceed the new de minimis limit of up to £500 per tax year.
Changes Applying to Trusts from 6 April 2024
These simplification measures will mean trustees of low-income trusts should consider annually monitoring whether a trust should report to HMRC. Trustees being brought into reporting requirements by the below measures should seek advice promptly.
£500 de minimis limit:
Trusts will not pay tax on income up to £500 (divisible to a minimum of £100 where there are multiple discretionary or accumulation settlements by the same settlor). HMRC’s R185 statement of income from trust form will be amended in respect of income within this de minimis limit being distributed to interest in possession (IIP) and settlor-interested trust beneficiaries, removing the need for repayment claims by beneficiaries with income covered by their allowances.
For trusts liable to trust rates with income within this de minimis limit, nothing will enter the tax pool on this income, but beneficiaries will continue to be entitled to a 45 per cent tax credit on all distributed income and so trustees will need to pay to cover tax when this income is distributed.
Having income within this de minimis limit would not cause trusts registered with the Trust Registration Service as non-taxable to need to register as taxable trusts.
Trustees currently staying outside of UK reporting requirements by having only savings interest income that would not be subject to tax exceeding £100 could now consider not restricting the trust to interest income.
Standard Rate Band Removal:
The £1,000 Standard Rate Band (divisible to a minimum of £200 where there are multiple discretionary or accumulation settlements by the same settlor) for discretionary and accumulation trusts has been removed. Until 6 April 2024, income within the Standard Rate Band was taxed at basic rates, as opposed to the higher rates applicable to trusts for income exceeding this band (i.e. 8.75 per cent and 20 per cent instead of 39.35 per cent and 45 per cent for dividends and other income respectively).
Non-UK trusts receiving only UK dividends totalling less than the previously available Standard Rate Band will now have to notify for self-assessment and pay tax on this income if it exceeds the new de minimis limit. Non-UK trusts with only UK dividends within the Standard Rate Band would have previously been treated as having paid all the Basic Rate Tax on these dividends.
Removal of the Standard Rate Band will remove one factor contributing to discretionary trust trustees paying tax shortfalls when distributions are made. However, trustees must still ensure funds are maintained to meet tax pool liabilities, as tax credits may exceed the tax pool for other reasons, such as the rates applicable to trusts on dividends.
Changes applying to Trusts and IHT Planning from 6 April 2025
IHT Planning:
There is a ticking clock for non-doms to create trusts containing overseas assets excluded from UK IHT, which must be done before 6 April 2025. It is worth noting that a Labour Government may make changes that would bring the foreign assets of excluded property trusts within the scope of UK IHT or that could potentially bring forward this April 2025 deadline.
Grunberg & Co are well placed to assist non-doms with this and other planning in light of the incoming changes to the UK tax system.
This planning has historically been employed by individuals who were due to become deemed domiciled (for UK IHT purposes) due to being long-term resident in the UK.
Such trusts settled after 5 April 2025 will potentially be subject to IHT (on creation, assets exiting the trust, and 10-year anniversaries) if the settlor is subject to IHT per the incoming system based on being a UK resident for 10 years (which will replace the domicile based IHT system).
Settlor-interested trusts:
From 6 April 2025, non-domiciled and deemed domiciled settlors will be directly taxed on foreign income and gains from any settlor-interested trusts (unless the settlor is within the first 4 years of the new 4-year foreign income and gains system following 10 consecutive years of non-residence).
Settlor-interested trusts settled before 6 April 2025 containing overseas assets will continue to be excluded from UK IHT (unless further changes to the law are made).
The definition of settlor-interested varies for different taxes but may include trusts where either the settlor, their family (e.g. their: spouse, civil partner, children, or grandchildren) or companies controlled by the above could benefit from the trust.
Pre 6-April 2025 Foreign Income and Gains:
Foreign income and gains arising until 6 April 2025 in protected non-resident trusts will not be taxed unless distributions or benefits are paid to individuals who have been UK resident for over 4 years.
From 6 April 2025, the remittance basis cannot be claimed by UK resident non-dom beneficiaries in respect of pre-6 April 2025 foreign income and gains matched with trust distributions to UK resident beneficiaries.
For the 2025/26 and 2026/27 tax years, individuals who have claimed the remittance basis will be able to remit foreign income and gains that arose before 6 April 2025 to the UK via the Temporary Repatriation Facility (TRF) incurring a relatively low UK tax rate of 12 per cent, however, foreign income and gains that arose within trusts have been specifically excluded from the TRF. To facilitate the TRF, the ordering rules for ‘mixed funds’ will be revised (full details are currently unavailable). Other transitional arrangements will also be temporarily available for former remittance basis users not qualifying for the new 4-year foreign income and gains system.
Changes Applying to Estates from 6 April 2024
If the income of an estate is within the £500 de minimis limit for all the tax years of the administration period and if informal reporting requirements are met, then there will no longer be a need for any reporting to HMRC.
For income distributed that was deemed to be within the £500 limit of the estate, UK beneficiaries will neither pay tax on this income nor receive a tax credit. Income within the £500 limit will only be deemed to be the source of distributions after all other categories of income (e.g. income subject to Basic Rate Tax) have been exhausted.
Note that ISA income remains non-taxable for 3 years after death and will not count towards the £500 limit.
If you require advice on how the changes impact you, don’t hesitate to contact us.
