View more on these topics

New tax regime for trusts

The income and capital gains tax changes relating to trusts proposed in the Pre-Budget report have been included in the Finance Bill 2004 and are effective from April 6.

For interest in possession trusts, the income tax position is unaffected by the proposals.

Discretionary trusts and accumulation and maintenance trusts, however, have the power to accumulate income and thus pay tax at the “rate applicable to trusts” (RAT) which will increase from 25 per cent to 32.5 per cent in the case of dividend income and from 34 per cent to 40 per cent for all other income. This is bad news for those trusts accumulating income as there will be a reduction of over 9 per cent in actual income accumulated.

Where income is paid out to beneficiaries, this change should be tax-neutral for them as they will simply be able to reclaim a bigger amount of tax if appropriate. Higher-rate taxpayers will have no further tax to pay. The increases will, however, improve the Inland Revenue&#39s cashflow as they will get tax at 40 per cent or 32.5 per cent when the income accrues to the trustees and need only refund lower-taxpaying beneficiaries when that income is subsequently paid out and a claim is made.

From a CGT perspective, the rate applicable to all trustees will increase from 34 per cent to 40 per cent from April 6. There is no prospect of a beneficiary reclaiming any CGT paid by the trustees and so this represents a straightforward tax increase of almost 18 per cent. A separate tax regime applies to chargeable gains under single-premium bonds and this is relevant to all three types of trust outlined above.

Trustees are assessed to tax on chargeable gains if the creator (settlor) of the trust:

•Is dead and a chargeable gain arises in a tax year subsequent to his death or •Is non-UK resident when a chargeable gain arises.

In these circumstances, the trustees are chargeable at the RAT. From April 6, the tax charge will increase to 40 per cent on the “gross” chargeable gain for offshore bonds and to 20 per cent on the “net” chargeable gain for UK bonds.

It should be noted that up until April 6, trustees of UK bonds had a liability to tax at 12 per cent (that is, 34 per cent less 22 per cent tax deemed to be paid within the life funds).

The rate of UK life fund tax on income and capital gains was reduced to 20 per cent from April 1, 2003 by the Finance Act 2003 and from April 6, the tax credit on chargeable gains on UK bonds reduced from 22 per cent to 20 per cent.

It is difficult to make a direct comparison but where dividend income is received by a bond (due to charges, timing, etc.) with a chargeable gain then being triggered by the trustees (taxable at a rate of 20 per cent for a UK bond held by trustees) compared with dividend income being received directly by trustees (which is accumulated and then distributed by the trustees), the position from April 6 of £1,000.00 with a tax credit of £111.11 will be broadly as follows in the table below.


Any type of trust realising capital gains will be adversely affected by the 40 per cent CGT charge.

Trusts which accumulate income will be penalised by having to pay extra tax. If the trust income is paid out to a beneficiary, it may be possible for some or all of the tax deducted to be recovered by the beneficiary but there will be a cashflow advantage for the Inland Revenue.

For bonds where the tax charge will fall on trustees, the increase is not good news either but it may be possible to avoid this problem by assigning the bonds free of trust prior to “triggering” the chargeable events.


Weakening rental sector sparks house price fears

Private sector rental inflation was just 4 per cent in the year up to September 2003, according to the first official figures published for the sector. Although rents have risen overall by 22 per cent in the last three years, there is concern that weakening of the rental market could hit property prices as the […]

ABI presses for a shift of focus to privately funded healthcare

Funding of UK healthcare is skewed towards the public sector, according to ABI head of health Richard Walsh. Walsh told last week&#39s Developing Next Generation Protection & Health Insurance Products conference that more private healthcare would increase patient choice, reduce waiting times and improve overall standards of care to enable the UK to compare well […]

Network members must unite against VAT on charges

Readers will have seen the Customs and Excise decision to start applying VAT to charges made to members of a network. Can I implore anyone who is part of a network to contact their senior management and make it clear what your feelings are. This is a radical change and alters what is nearly 20 […]

Forum wants fund firms to follow electronic trail

The Adviser Forum is turning its sights on fund managers with a project aimed at motivating fund firms to transact more electronic business with IFAs to save time and cost. The forum, which has had significant success in targeting the life and pension industry, is urging IFAs and fund managers to set up systems enabling […]

China tech and Global Alpha: a new great leap forward

By Robin Geffen, Fund Manager and CEO

Internet giant Alibaba is exactly the type of entrepreneurial company that the high-conviction, top-performing Neptune Global Alpha Fund seeks to invest in. Established just 14 years ago in an apartment in Hangzhou, today Alibaba is larger than Amazon and eBay put together and is challenging some of the most powerful internet companies in the world…

Read more 

Important information

Investment risks

The value of an investment and any income from it can fall as well as rise and you may not get back the amount originally invested. Forecasts and past performance are not a guide to future performance. Some information and statistical data herein has been obtained from sources we believe to be reliable but in no way are warranted by us as to their accuracy or completeness. These are Neptune’s views and as such this document is deemed to be impartial research. We do not undertake to advise you of any change to our views.


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm