Currently, the trust rate of tax on dividends is 32.5% and on other income, 40%.  From 6 April 2010 these rates will increase to 42.5% and 50% respectively.  Any tax paid by trustees is put into a “tax pool”, with the exception of dividend tax credits. 

When income payments are made to beneficiaries, they are currently deemed to have already suffered tax at 40%, which will increase to 50% from 6 April 2010.  This deemed tax is potentially assessable on the trustees, but may be offset against the tax pool first.

There may be adverse tax implications when making income payments to beneficiaries where dividends are the trust’s main source of income.  This is because there will be a shortfall between the deemed tax on the payment and the amount in the tax pool.

Some possibilities of mitigating this tax charge are:

·         Give a beneficiary a revocable life interest.  This will mean the beneficiary is assessed to tax on the income at their marginal rate of tax and can reduce the trustees’ compliance costs; or

·         Where the trust deed allows, it may be possible to make a capital payment.  This may incur an inheritance tax charge, being a maximum of 6%.

With the increase in tax rates the timing of distributions should also be considered, if you require any further advice then please contact Tracy Palmer at tracy.palmer@albertgoodman.co.uk or on 01823 286 096.

Posted on 09 Oct 2009