Overview

Trusts based in the UK which are discretionary in form are particularly badly hit by the new 50% income tax rate. By contrast with the situation for individuals, where the 50% income tax rate applies only on income above £150,000, the new 50% rate applies to trustees of discretionary trusts after the first £1,000.

The 50% trust tax rate applies even if the beneficiaries are non-taxpayers or liable to income tax only at lower rates.

As far as non-dividend income is concerned the problem is largely one of cash flow; if the beneficiaries pay tax at lower rates they can claim back from the HM Revenue and Customs (“HMRC”) part or all of the 50% income tax paid by the trustees.

However, there is a particular problem as far as dividend income is concerned, where there can be a real additional cost to beneficiaries of receiving dividends via a discretionary trust (rather than direct, or via an interest in possession trust).

This briefing examines in detail, the effect of the 50% income tax rate on discretionary trusts and sets out some of the practical measures which Charles Russell solicitors have identified for ameliorating such effects.