Modernising the Tax System for Trusts
As previewed in last year’s Budget, a basic rate band will be introduced and will apply to the first £500 of income of all discretionary trusts and accumulation trusts liable at the ‘rate applicable to trusts’, which remains at 40% (32.5% for dividend income). The band will apply for 2005/06 onwards. Trusts with total income within the basic rate band will have no further liability on income received net of tax or with accompanying tax credit and will be liable at only basic rate or lower rate (depending on the type of income) on income received gross.

Again as announced last year, a new regime is being introduced for certain trusts with vulnerable beneficiaries. Its introduction is being backdated to 6 April 2004. According to the announcement made last year, the regime will enable such trusts to be taxed on the basis of the vulnerable beneficiary’s individual circumstances, taking account of his own personal reliefs and tax rates.

Other measures announced in the 2004 Budget relating to the modernisation of trusts have now been postponed until 6 April 2006 at the earliest. A discussion paper has been published today.