Tax rate increases will affect trusts

From April 2010, the Chancellor's new higher rate tax band will have a dramatic impact on discretionary and accumulation trusts.

Tax rates will increase to 42.5% for dividend income and 50% for other trust income. Those trusts that distribute more income than can be franked by the trustees' tax pool will see an increase in the notorious tax pool charge.
But following changes to the inheritance tax treatment of trusts in 2006, there may be opportunities to avoid the higher rates. If the deed allows, trustees can set up ‘flexible interest in possession' trusts which provide the option to switch the right to income easily between beneficiaries. This will reduce the trust tax to the basic rate and not incur an inheritance tax charge.

Other options

As a trustee, you may also be able to take advantage of the current economic climate to restructure your investments. If there are no significant capital gains, you might consider putting your investments into a bond wrapper from which you can withdraw tax-free capital of up to 5% per year. If you distribute these capital sums to beneficiaries, some trusts may incur inheritance tax charges but the maximum rate would be only 6% compared to 50% income tax.

To discuss how the tax rate increases will affect your trust, speak to Littlejohn trust tax specialist Barry Luscombe on 020 7516 2204 or email bluscombe@littlejohnllp.com