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From 6 April 2024, trusts and estates will no longer report or pay tax on income up to £500 per tax year. This is an all-or-nothing limit (i.e. it will not apply where income exceeds £500). Also, both the previous reporting exemption where there was only savings interest with tax not exceeding £100 and the Standard Rate Band of up to £1,000 (for discretionary and accumulation trusts) will simultaneously be removed.
Trust Changes
These simplification measures will mean trustees of low-income trusts should consider annually monitoring whether a trust should report to HMRC. Trustees being brought into reporting requirements by the below measures should seek advice promptly.
£500 de minimis limit:
Trusts will not pay tax on income up to £500 (minimum of £100 where settlor settled multiple discretionary trusts). HMRC’s R185 form will be amended in respect of income within this de minimis limit being distributed to IIP and settlor-interested trust beneficiaries.
For trusts liable to trust rates with income within this de minimis limit, nothing will enter the tax pool on this income, but beneficiaries will continue to be entitled to a 45% tax credit on all distributed income and so trustees will need to pay to cover tax when this income is distributed.
Having income within this de minimis limit would not cause trusts registered with the Trust Registration Service as non-taxable to need to register as taxable.
Trustees currently staying outside of reporting requirements by having only savings interest income that would not be subject to tax exceeding £100 could now consider not restricting the trust to interest income.
Standard Rate Band Removal:
The £1,000 Standard Rate Band (minimum of £200 where settlor settled multiple discretionary trusts) for discretionary trusts will be removed. Until 6 April 2024, income within the Standard Rate Band was taxed at basic rates, as opposed to the higher rates applicable to trusts for income exceeding this band (i.e. 8.75% and 20% instead of 39.35% and 45% for dividends and other income respectively).
Non-UK trusts receiving only UK dividends totaling less than the previously available Standard Rate Band will now have to notify for self-assessment and pay tax on this income if it exceeds the new de minimis limit.
Removal of the Standard Rate Band will remove one factor contributing to discretionary trust trustees paying tax shortfalls when distributions are made. However, trustees must still ensure funds are maintained to meet tax pool liabilities, as tax credits may exceed the tax pool for other reasons (e.g. dividend income).
Estate Changes
If estate income is within the £500 de minimis limit for all tax years and if informal reporting requirements are met, then there will no longer be a need for any reporting to HMRC.
For income distributed that was deemed to be within the £500 limit of the estate, UK beneficiaries will neither pay tax on this income nor receive a tax credit.
Note that Individual Savings Account (ISA) income remains non-taxable for 3 years after death and will not count towards the £500 limit.
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