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Make Mine a "Half and Half"
With apologies to those readers who have been reminded of the alcoholic beverages of their youth by the title, this piece is about the rate applicable to trusts that is to become 50% on 6 April 2010 with the dividend trust rate becoming 42.5% from the same date.
These rates will apply above the maximum standard rate band of £1,000 where the trustees have the power to accumulate income or have discretion over its distribution.
In many cases the increases will merely be an irritant since a beneficiary who receives income will get it together with an associated tax credit, some or all of which will be reclaimable if the beneficiary is not liable at the new top personal rate of 50%. The first planning point may therefore be that trustees may, from next April, want to review the extent to which they make distributions to beneficiaries with a view to maximizing recovery of the new higher tax charge.
However, the problem remains (indeed is exacerbated) which was created by Gordon Brown’s now infamous changes to the treatment of dividend tax credits; namely, in the context of trusts, that the notional tax credit on dividend income will not go into the trust’s tax pool. The second planning point is therefore that trustees might consider appointing revocable interests in possession in favour of beneficiaries. The trustees’ liability will then be limited to basic rate which in many cases will mean that they do not actually have to make any payments to HMRC; and the problem of loss of the notional tax credit from the tax pool disappears (as does the pool itself). Such revocable appointments no longer have any IHT implications and there should be no CGT consequences.
Should you wish to discuss this strategy in more detail please contact Terry Jordan on 020 8922 9360 or e-mail terry.jordan@bkltax.co.uk ...one of our "glass half-full" tax consultants.
