Modernising the Tax System for Trusts
For 2006/07 onwards, the ‘basic rate’ band available to the trustees of discretionary trusts and accumulation and maintenance trusts is increased from £500 to £1,000.

Following an earlier consultation exercise, a number of definitions and tests used in taxing trusts to income tax and capital gains tax are to be altered and aligned across the two taxes. The main changes are:

• a common test as to whether trustees are UK-resident;
• a common meaning of ‘settled property’ and thus of ‘settlement’;
• a common meaning of ‘settlor’;
• provision for trustees to be treated as one person; and
• provision for trustees to elect that a sub-fund of the settlement be treated as a separate settlement in certain circumstances.

These changes have effect for 2006/07 onwards, apart from the first-listed change, which has effect for 2007/08 onwards. The new definitions and tests may not apply for all purposes, for example certain anti-avoidance purposes.

The following changes will also be introduced for 2006/07 onwards:

• the income of settlor-interested trusts is to be treated as though it had arisen directly to the settlor;
• an existing practice of not taxing beneficiaries in receipt of discretionary income from settlor-interested trusts is to be given statutory effect; and
• modifications will be made to certain pre-existing capital gains rules which determine whether a settlor has an interest in the settlement.

Some of the proposed changes included in the earlier consultation exercise, for example income streaming and changes to the capital gains taxation of deceased persons’ estates, are not being taken forward at this time.