The Chancellor of the Exchequer, the Rt Hon. Jeremy Hunt MP, delivered Spring Budget 2023 to Parliament on 15 March 2023 and announced the following changes to trust taxation.
Low-income exemption
Currently, trusts that receive solely savings income in a tax year giving rise to tax of £100 or less (£500 for interest in possession trusts and £222 for discretionary trusts), have no reporting obligations or tax liability.
With effect from 6 April 2024, this exemption will be removed. Trusts with total income (including non-savings and dividends) up to £500 per annum do have no reporting requirement to HM Revenue & Customs (“HMRC”) and do not pay tax on that income as it arises. However, where a settlor has set up more than one trust, the £500 limit is reduced. The amount is the higher of £100 or £500 divided by the total number of trusts created by the settlor (subject to some exceptions).
This change is intended to simplify the compliance matters of low-income trusts. This measure will also help reduce costs associated with trust administration.
Standard rate band removal
Currently, discretionary trusts are subject to Income Tax at the rates applicable to trusts, being 45% on non-savings and savings income, and 39.35% on dividend income. However, the first £1,000 of income is subject to the basic rates of 20% on non-savings and savings income, and 8.75% on dividend income.
With effect from 6 April 2024, it is announced that the £1,000 income tax standard rate band for discretionary trusts will be eliminated and all income (savings or non-savings income) previously taxable at the default basic rate (20% on non-savings and savings income, and 8.75% on dividend income) will be taxable at the trust rates of 45% for all other income and 39.35% for dividends.
This should not have an undue impact on the tax liabilities of a discretionary trust, as income above £1,000 is already taxed at trust rates (45% or 39,35%), so the maximum increase in tax liability after 6 April 2024 as a result of this change will be £450.
Capital gains tax (“CGT”) – tax-free allowance
Trusts only have to pay Capital Gains Tax if the total realized taxable gain is above the trust’s tax-free allowance (called the ‘annual exempt amount’ or “AEA”).
With effect from 6 April 2023, the CGT AEA available to trustees has been reduced from £6,150 to £3,000 and will be further reduced to £1,500 from 6 April 2024.
If a settlor has set up more than one trust, the tax-free allowance will be divided equally between the number of trusts, up to a maximum of 5. If there are 5 or more, the tax-free allowance would remain the same for each subsequent trust (i.e. a de minimis limit of one-fifth of the AEA per trust).
Inheritance tax (“IHT”)
HMRC will make changes to IHT regulations during the year 2023/24 to remove some non-taxpaying trusts from IHT reporting requirements.
It is also announced that, with effect from 6 April 2024, IHT Agricultural Property Relief (“APR”) and woodlands relief will be restricted to property located only in the UK, excluding its application to property in the European Economic Area (“EEA”) and, in relation to APR, excluding its application to property in the Channel Islands and the Isle of Man.
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