News from 35 Finance for Solicitors and Accountants
The following are news items specifically for our Solicitors and Accountant connections.
17-Jan-2012 | |
Pension Funding Challenges for High Earners | |
11-Jan-2012 | |
News updates for Solicitors and Accountants | |
1-Dec-2011 | |
SRA to take first ABS applications in the new year | |
6-Jul-2011 | |
Carry Forward, The Rules, How it Works in Practice, Defined Benefit Schemes and Summary | |
1-Jun-2011 | |
Delay for solicitor ABS is likely | |
6-May-2011 | |
New SRA Handbook arrives on time | |
1-Feb-2011 | |
Recent Pension Changes | |
1-Jul-2010 | |
Annuities Revisited | |
30-Jun-2010 | |
Spousal Bypass Trusts | |
30-Apr-2010 | |
With or Without Profit | |
1-Mar-2010 | |
The Need for Change | |
11-Jan-2010 | |
SIFA newsletter - September 2009 | |
2-Dec-2009 | |
Forthcoming tax changes 2010 | |
The following article is a more in-depth review
Tax Changes to Trusts
Why now is the time to review your trust clients
By Rebecca Lucas
Changes to the inheritance tax treatment of trusts in 2006, a decrease in the capital gains tax rate in 2008 and now planned increases to the income tax rate applicable to Discretionary trusts due to take effect next tax year (2010/11). All of these changes mean now is a good time to review your trust clients.
As you will know the Trustee Act 2000 sets out a framework for trustees in approaching their investment duties. As you can well appreciate, many trusts will be affected by this new income tax regime and the trustees will need appropriate advice to fulfil their duties.
- 116,000 Discretionary Trusts filed tax returns with HMRC 2006/07
- HMRC quote income generated from discretionary trusts of £715M from dividends, £375M from interest and £225M from rent (2006/07).
Discretionary trusts have £1,000 (per settlor) of income which is taxed at the basic rate tax rates (10% and 20% respectively). Any income over that amount will from next tax year be taxed at 50% for savings and property income and 42.5% for dividends (bringing discretionary trusts in line with new income tax rates for those individuals earning in excess of £150k!).
Paying this increased amount of tax will mean more of the trust's income needs to be retained to pay the tax, hence there is less money available for beneficiaries. Where income is paid out, beneficiaries can reclaim tax paid over their marginal rates of tax, however there will be a cost to the beneficiary in doing this and in any case if the trust does not wish to pay income out, these new higher rates will apply. Because of the way dividend income is taxed when paid out to beneficiaries, there is less net income available because the 10% tax credit is ineligible for franking.
|
Source of income |
Current position - 2009/10 |
Future position - 2010/2011 |
|
Interest, Property income |
40% |
50% |
|
Dividends |
32.5% |
42.5% |
There are ways that this higher tax charge can be mitigated and these are areas we can and have been providing advice to our trust clients on. Where income does not need to be paid out to beneficiaries an investment portfolio can be moved to a growth strategy, minimising income generated to take advantage of the lower rate of capital gains tax (18%), but the trustees need to be made aware that this may increase the volatility of the portfolio.
An alternative to this would be to use an Investment Bond. Investment bonds are only liable to income tax (no capital gains tax) and tax is paid when the bond is encashed. Income (up to 5% of the original amount invested) can be paid out to beneficiaries without any immediate tax liability and investment funds can be switched within the bond (if required) without giving rise to tax. Also, if capital needs to be paid out to beneficiaries, segments of the bond can be assigned and then surrendered by the beneficiary and taxed at their marginal rate of tax and not the trust tax rate. Bonds can be set up offshore, in which case there will be no tax until a chargeable event occurs, normally when the bond is encashed. This gives the flexibility of choosing when tax is paid but also the benefit of gross roll up.
Another advantage of using investment bonds within a trust is that form 41G does not need to be completed and logged with HMRC (as long as an investment bond is the trust asset from outset). An investment portfolio with a variety of investments can be constructed within the bond to suit the objectives and risk profile of the trust.
Another way of mitigating the higher rates of income tax could be to change the trust from a Discretionary trust to an Interest in Possession trust (via deed of appointment, which could be drawn up by your firm). Of course, this is only possible if it fits with the objectives of the trust. The income from an Interest in Possession trust is taxed at 10% for dividends and 20% for rent and fixed interest income, if the beneficiary is a basic rate taxpayer (as opposed to 42.5% and 50% respectively). It can be revocable, so the trust can be changed back to a discretionary trust in the future, if required.
At 35 Finance we specialise in working with solicitors, and we have specialist qualifications for advising trustees and reviewing trust investments. We also specialise in pensions, for Pension Sharing Orders, investments for Inheritance Tax planning and Personal Injury Settlements.
If you would like to talk to us about the tax changes in this update, financial advice to you or your clients in areas mentioned above, or how we can work together to benefit you and your clients please call us to discuss.
Rebecca Lucas DipPFS, IMC
The information on this page is for Solicitors and Accountants only, and not intended for the general public.