Tony Wickenden: Showing your worth to the gatekeepers of the trustee world

Tony Wickenden

Last week I looked at the impact the changes to the taxation of capital gains and dividends might have on corporate and charity investment decision-making. This week, I want to look at how trustees of private non-charitable trusts will be affected.

Trustee taxation is a comparatively complex subject. This is perhaps the main reason why becoming conversant in it can differentiate advisers aspiring to do more business with and through other professionals, such as accountants and solicitors.

These professionals are most likely to be the “gatekeepers” to the trustee investment market. Any tax change represents a good opportunity to engage with trustees or, perhaps more likely, the advisers to trustees. To capitalise on this effectively, however, it is essential to have an understanding of the fundamentals.

So, do the changes to capital gains tax and dividend taxation offer advisers the opportunity to communicate with other professionals? The answer is definitely affirmative.

Capital gains tax

Let’s consider CGT first. If the trust is a bare trust (for example, one set up by a parent or grandparent for the absolute benefit of a child or children), then regardless of who the donor is (even if they are the parent of the minor unmarried child beneficiary) there will be a “look through” to the beneficiaries. This means all capital gains realised by the trustees will be assessed on the beneficiaries.

So it will be the beneficiary’s annual CGT exemption and the beneficiary’s tax status that will be relevant in determining how much tax is payable, not the trustees’.

If we accept most bare trusts will be for the benefit of minor children, then, in most cases, realised gains in a year are likely to fall wholly (or at least substantially) within the beneficiary’s annual CGT exemption. To the extent gains exceed this amount the reduction of the lower rate charged from 18 per cent to 10 per cent will, of course, be beneficial.

Most trusts, however, will be other than bare trusts. How do the CGT changes affect these?  Well, any capital gains made by trustees of a trust under which the beneficiary does not have an absolute and unconditional right to the capital will be assessed on the trustees.

The trustees will be entitled to an annual CGT exemption equal to (at most) one half of the annual exemption available to individuals. If the same settlor has established more than one settlement, then each settlement will be entitled to an appropriate proportion of the available (50 per cent of an individual’s) exemption provided that it shall never be less than 10 per cent of the full annual exemption: so £1,110 in 2016/17.

So what rate of CGT are trustees of non-bare trusts subject to on realised gains? It is the highest rate. This means from the 2016/17 tax year the rate will be 20 per cent. That is quite a big drop from the 2015/16 rate of 28 per cent.

As with some individual investors, in light of the reduced rates some trustees may well have decided to defer realising gains that would exceed the annual CGT exemption until the 2016/17 tax year. Of course, as for all tax planning decisions, the course of action considered should only be adopted if it is first acceptable on investment/personal grounds.

Dividend tax

So how about dividends? Well, if a beneficiary has an absolute vested right to the trust income, the dividend allowance will be available to them in relation to their share of the income. However, the trustees will need to pay tax at 7.5 per cent on the income they receive and this will need to be reclaimed by the beneficiary entitled to it if that income falls within their dividend allowance. It may be possible to avoid this “deduction and reclaim” if the income is directly mandated to the beneficiary from the paying source.

Under discretionary trusts no one is entitled to the income when it arises and trustees of discretionary trusts do not qualify for the dividend allowance. Any dividends that fall within the trust’s standard rate band (maximum £1,000) will be taxed at 7.5 per cent and, above this, at the highest rate of 38.1 per cent. Payment of any income to beneficiaries will be trust income and so will not qualify for the dividend allowance.

Dependent on the trust and its objectives, an investment bond may prove to be a tax-effective investment for a discretionary trust looking for longer-term growth through capital gains and reinvested income.

If nothing else, the dividend and CGT changes give advisers an excellent opportunity to engage with solicitors and accountants about trustee investment.

Tony Wickenden is joint managing director of Technical Connection. You can find him tweeting @tecconn