For those with minor children/grandchildren, opportunities that existed for using their personal income tax allowance by setting up trusts for their benefit under which the trustees invest in distribution units of equity unit trusts, OEICs and investment trusts ceased to exist from 6 April 1999. This is because the tax credit attaching to dividends from UK companies and distributions from equity unit trusts can no longer be reclaimed. Despite the pressure to reinstate this ability, no action has been taken although the Conservatives have stated that, if elected, they would act to reinstate the tax credit reclaim for non-taxpayers – subject, of course, to the anti-avoidance provisions applying to parental settlors of settlements for minor unmarried children.
In relation to trusts established for a minor unmarried child where that child has an entitlement to income, if the income exceeds £100 gross in a tax year it is automatically taxed on the parental settlor irrespective of whether the income is paid to or for the child's benefit. However, scope exists for trusts for grandchildren where consideration should be given to investing offshore to obtain the benefit of gross dividends or distributions. If it is desired to achieve tax effective accumulation of income from UK investments held in a trust under which the grandchild has an interest in possession then, subject to investment considerations, it will be necessary to invest in areas that produce income other than UK dividend income. As well as interest from cash deposits, this will include income from corporate bonds and certain unit trusts whose income payments are treated as interest distributions rather than dividends.