This bulletin addresses some additional issues connected with the change to the taxation of UK dividend source income to and paid from discretionary and accumulation trusts.
Following the major change relating to distributions introduced by the Finance Act 1994, section 468 L ICTA 1988, this introduces a new distribution regime for authorised unit trusts enabling them to pay out available income as interest. Such payments are then referred to as 'interest distributions'.
In practice this will generally only apply to bond funds in view of the requirement that interest distributions can only be paid if the authorised unit trust satisfies the 6 January 'qualifying investments' test throughout the distribution period. Section 468L provides that authorised unit trusts, which are liable to corporation tax at the rate equal to the lower rate of income tax, may pay interest distributions or accumulations which for tax purposes will constitute payments of yearly interest made on the relevant distribution date.
Such interest distributions are payable subject to deduction of income tax at the lower rate on the gross amount, currently 20 January. Such interest distributions are then taxed in the same way as ordinary interest rather than as dividend income.
Clearly where trustees invest in different types of unit trusts, such as unit trusts with underlying investments in equities and unit trusts with underlying investments in bonds, they will have to treat the two sources of income as separate and this will then be reflected in the appropriate taxation of that income on the trustees and, if distributed, on the beneficiaries, in the same way as if the income distributed were derived either from dividend income or interest income. The new provisions relating to income distributions from discretionary trusts where the source of the income is UK dividends will not apply to any 'interest' income.