Dividend tax for Trusts
Dividend tax for Trusts – Introduction
For a long period of time, the taxation of dividends remained relatively stable and un-tinkered with for both individuals and Trustee.
However, like all good (and understood things) with effect from April 2016, the status quo was broken.
The rules for individuals receiving dividends is set out in our article on dividend tax. The remainder of this article sets out the changes as they apply to Trustees.
Dividend tax for Trusts: the rules from 6 April 2016
As stated in our article focussed on individuals, the main result of the changes was to abolish the 10% notional tax credit. Instead, this was replaced by a new a ‘dividend allowance’. Originally this was set at £5k however this was sliced to just £5k with effect from April 2018.
In respect of dividends received in excess of this, then the tax rate would be as follows:
- To the extent that the dividend falls in the basic rate band: 7.5%;
- To the extent that the dividend falls in to the higher rate band: 32.5%; and
- To the extent that the dividend falls in to the additional rate band: 38.1%
Dividend tax for Trusts – what is the tax position?
The tax position will depend on the type of trust. Specifically, it will depend whether the trust is:
- A life interest trust (also known as an interest in possession trust or IIP trusts);
- A discretionary trust; or
- A bare trust
A trust may be a combination of the above. For instance, it is quite common for a discretionary trust to create a life interest in favour of a beneficiary. Where this is the case then the rules relating to life interest or IIP trust will apply to the income under the life interest or IIIP. The discretionary trust rules will apply to the balance.
It is the Trustees responsibility to pay the tax for both life interest / IIP trusts and discretionary trusts.
The income distributed (and tax deducted) by the trustees is certified by them on Form R185.
Dividend tax for trusts – Life interest / IIP trusts
Under the new rules, the life interest or IIP trust is not able to take advantage of the dividend allowance. Instead, the trust will pay basic rate tax at 7.5% on all of their dividend income. The 7.5% tax paid by the Trustees will be credited to the beneficiary along with the income.
The beneficiary will be entitled to the dividend allowance. If, in the hands the beneficiary, he or she would have had a lower tax liability in relation to the income then the beneficiary can claim a repayment
However, if the beneficiary is a higher or additional rate taxpayer then he or she will have to pay the balance of any tax due through their personal tax return.
It is possible to mandate dividend income to a beneficiary. This means they receive it directly and there is no need for trustees having to process the tax.
Dividend tax for trusts – Discretionary trusts
The trustees of a discretionary are also not able to utilise the dividend allowance. However, trustees of discretionary trusts are eligible for a £1,000 standard rate band although, where the settlor has established other trusts, then this is likely to be apportioned equally between all of the trusts.
Where the income exceeds this threshold then it is subject to the rather grandly titled ‘Rate Applicable to Trust. However, the acronym RAT is more apt as this is 38.1% on dividend income received above the threshold.
Any tax that is paid by the Trustees is credited to what is known as the tax pool. Where income is paid to the beneficiaries then it is deemed to carry a 45% tax credit. Where this 45% exceeds what is in the tax pool then further tax will have to be paid by the trustees. All of the income that is paid to the beneficiaries is treated as non-savings income.
The beneficiary will be subject to tax on these receipts at their marginal rates (20% / 40% / 45%). This means that those who do not pay tax at the highest rate on their income will be entitled to receive a repayment.
It should be noted that, in contrast to beneficiaries of life interest / IIP trusts, the dividend allowance cannotbe used against the income from the trust.
Dividend tax for trusts – Bare trusts
A bare trust is not a proper trust. It is a nominee arrangement. As such, the beneficiary (and the beneficiary alone) is subject to tax on the income that is received by the bare trustee.
A beneficiary of such an arrangement is entitled to the dividend allowance.
Dividend tax for trusts – Estates
The final scenario it is worth discussing is where dividends are received by the executors of an estate. How are these taxed?
Firstly, the dividend allowance cannot be utilised.
The executors will pay tax at 7.5% on any dividends they receive with the beneficiaries of the estate being given a credit for this tax paid. Where the credit exceeds the beneficiaries actual tax then he or she should be able to reclaim a tax refund.
If you or your client have any queries regarding the dividend tax for trusts or any other tax matters then please do not hesitate to get in touch