Trustees Taxation

Under a Government proposal to be implemented from April 2010, the beneficiaries of Discretionary Trusts will see up to half their income disappear in tax.

At present, Discretionary Trusts are subject to 40% Income Tax, with a Trust rate of 32.5% for dividends. From April 2010, these rates will jump to 50% and 42.5% respectively.

The Government clearly has a profound dislike of Trusts, believing they are used by the wealthy to avoid tax, with the top 50% taxation rate mirroring the new "super-wealthy" Income Tax rate for those earning more than £150,000 per annum. Where Discretionary Trusts are concerned, the rate applies whatever the level of Trust income, irrespective of the beneficiaries' financial circumstances, although self-assessment can be made if all of the income is withdrawn.

However, investment in an insurance company Investment Bond offers unique tax advantages, which can be used by Trustees to solve this problem. An Investment Bond is non-income producing although withdrawals can be taken up to 5% of the original capital each year with the ability to defer tax and choose a tax point to benefit from lower tax rates. Funds within the bond can be switched without a tax charge and the bond can be assigned to a third party, which can be particularly helpful to Trustees.

Whilst legislation changes do not help Trustees and beneficiaries, Trusts remain a core method for passing on wealth across generations.

Please note the value of the insurance bond depends upon the underlying assets which can go down in value as well as up.

Please contact your usual adviser at Lycetts if you would like to discuss this further.