Tax-free savings income and trust tax returns from 2016/17

HMRC publishes informal relaxation to help trustees 

The new rules for paying interest income gross from 2016/17 mean that some trusts will have to do tax returns for the first time. HMRC has published an informal relaxation to help trustees where the only source of income is savings interest and the tax liability is below £100. 

As announced in the spring 2015 Budget, from 6 April 2016 some individuals will be able to receive savings income free of tax. Basic rate taxpayers will be able to receive up to £1,000 tax-free, higher rate taxpayers can receive £500, but there will be no tax-free allowance for additional rate taxpayers. 

From the same date banks and building societies will be paying interest gross so there will be no need to claim tax back on interest receipts below the threshold. 

At present many small trusts do not have to file a tax return because they only receive income that has had tax deducted at source, or in the case of a discretionary trust, because no tax is payable at the rate applicable to trusts as the income is within the trust standard rate band. 

When interest is paid gross, this will result in many small trusts having a tax liability and so having to do a tax return. This will increase the administration for the trustees – but also for HMRC. As HMRC do not provide software for trustee returns, it could be inundated with paper returns prior to 31 October 2017; alternatively, or trustees will have to incur the expense of engaging an agent or buying their own software to submit an electronic return.  

This point was made by the Tax Faculty representative at HMRC’s Trusts and Estates Agents Advisory Group meeting on 25 February 2016. 

HMRC updated its policy paper on the personal savings allowance on 1 April 2016 to say that no notification will be required for 2016/17 from trustees or personal representatives dealing with estates in administration where the only source of income is savings interest and the tax liability is below £100. 

This is an interim informal arrangement and further details will be publicised and communicated by HMRC with stakeholders in due course.