Budget Notes

BN53 INCOME OF BENEFICIARIES UNDER SETTLOR-INTERESTED TRUSTS

Who is likely to be affected?

1. Individuals who receive discretionary income payments from a settlor-interested trust and who also receive savings or dividend income.

General description of the measure

2. Legislation will be introduced in Finance Bill 2008 to rectify an unintended consequence of the Trusts Modernisation legislation in Finance Act 2006.

Operative date

3. The measure will have effect on or after 6 April 2006 (the date on and after which this part of the Trusts Modernisation legislation has effect).

Current law and proposed revisions

4. The income of a 'settlor-interested' trust is deemed, for the purposes of income tax, to be the settlor's income. Tax paid by the trustees of such trusts is treated as paid on behalf of the settlor. This is in contrast to other trusts where the tax paid by trustees is available to the beneficiaries. To avoid the double taxation which would otherwise result, section 685A of the Income Tax (Trading and Other Income) Act 2005 provides that income paid by trustees of a settlor-interested trust to (non-settlor) beneficiaries comes with a non-repayable 'notional' tax credit equal to the higher rate of tax (currently 40 per cent) which covers all the tax liability on that income.

5. However, under current statutory ordering rules income from a trust is charged before savings and/or dividend income. The result is that a beneficiary of such a trust who also has savings and/or dividend income may find that the non-trust income is pushed into higher rates so that more tax is due overall.

6. The measure amends this ordering rule, such that income from a settlor-interested trust is treated within section 1012 of the Income Tax Act 2007 as one of the highest slices of income.

Further advice

7. If you have any questions about this change, please contact Kyri Souppouris on 020 7147 2760 (email: kyri.souppouris@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk