Planning for discretionary trust income?

As you'll be aware from recent press and industry coverage the dividend regime is changing and from 6 April 2016 the tax rates are changing and the notional tax credit will disappear.  Individuals will benefit from the new "tax allowance" for dividend income (of £5,000 at 0%) but discretionary trustees will not benefit from similar exemption. 

The result?  Dividend income received by a discretionary trust will be taxed at 38.1%.   Of course, when the income is distributed to beneficiaries they will be able to benefit from the tax credit attached to the trust income,  however, the trust income will loses its identity so will be taxed as trust income and not dividend income.  In this situation, neither the trust nor the discretionary beneficiary will be able to benefit from the £5,000 allowance.  

In certain circumstances, the trustees could consider creating interests in possession and mandating the income to beneficiaries.  If the beneficiaries are not making use of the dividend allowance in their own right they will benefit from the £5,000 dividend being taxed at 0%. 

The tax position of the beneficiaries and the terms of the trust deed will, of course, need consideration.    

If you wish to discuss this further please call Alison Welch on 01325 349700.