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Changes to the taxation of post-April 1999 dividend distribution for discretionary trusts

With the approach of 6 April 1999 comes the realisation amongst advisers to discretionary trusts that tax life for distribution of trust income that has as its source UK dividends will take a fairly dramatic change for the worse.

We have addressed in previous bulletins and in [REF] UK trust taxation [TXUK] how these charges will operate.

Change, as ever, gives rise to opportunity and what follows is a summary of some key issues to communicate to trust clients in advance of (or after) 6 April this year.

Despite the undoubted potential for the diminishment of net dividend income distributed from discretionary trusts (due to the loss of the tax credit element in dividends from the tax pools of discretionary trusts – ie. the amount of tax that trustees have paid for tax purposes or deemed to have paid and thus have available to &#34frank&#34 payments out of trusts) it is essential to assess the situation of each particular trust in order to ascertain the most appropriate action.

Some trusts, for example, may have significant brought forward tax pools eg accumulated from income previously received carrying tax credits (allowed in the pool) and actual tax paid on such income. Such `surplus` tax pools could mean that, even with the new changes taking effect, additional tax may not be payable on distributions for a considerable time.

The UK equity component of the trust portfolio maybe small so the change has little significance.

It may be possible to scale back distributions – especially if such distributions are not really needed. There is little tax change in respect of accumulated dividend income.

If a trust has invested in private company shares there may be scope for a large pre 6 April dividend and trust distribution.

Investments could be changed e.g. to gilts, bonds, deposits, non UK shares even insurance bonds. Of course any CGT on realisation will need to be taken into account as will non tax and investment issues.

It may even be appropriate to consider appointing an interest in possession, or appointing capital.

So there are just a few possibilities the one certainty is that a review of discretionary trusts will usually be appreciated and is highly likely to produce scope for business or advice.


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