New rules for the taxation of dividend and trusts

This article replaces the original (see Trust tax returns - another online filing problem with the new dividend tax rules) in which we regret there was an error in our commentary on the new rules as they relate to discretionary trusts and the tax pool. Our original article incorrectly said that the tax paid on the income used to pay TME should be added to the tax pool.

Discretionary trusts are liable to income tax at 38.1% for dividends and 45% for other income except for the income covered by the standard rate band and income used to pay the trust management expenses (TME), which is only liable at 7.5% if the income source is dividends and 20% if it is other income.

Every payment from a discretionary trust has to franked by tax paid by the trustees. All tax paid by the trustees is added to the tax pool to frank distributions to beneficiaries. The tax on the standard rate band income is added to the tax pool; the Finance Bill 2016 omitted to amend the tax pool rules to add the 7.5% tax actually paid on dividends to the tax pool and this was corrected before it became the Finance Act 2016. The standard rate band income has not been distributed/paid as expenses, it is still in the accumulated income and so the tax is reflected in the tax pool.

However the tax paid on the income used to pay the TME is not added to the tax pool, the payment of the expenses has to, in effect, be franked and thus the tax is not available to the tax pool for distributions. The income has been spent so is not a part of the accumulated income.

To be clear, the calculation produced by the HMRC approved software correctly calculates the tax pool by not adding in any of the tax paid on income used to pay TME.

  • This article is still confusing/contradictory.

    In the third paragraph, All tax paid by the trustees is NOT added to the tax pool to frank distributions to beneficiaries.

    Instead, as later stated, the tax paid on the income used to pay the TME is not added to the tax pool.