Alastair Darling has announced increases to the dividend trust rate, and the trust rate of tax, effective from 6 April 2011. These tax rates apply to income within discretionary settlements. After the quite radical inheritance tax changes made by the government two years ago to trusts, it feels that they are once again taking the opportunity to have a further dig!
Trusts are taxed as entities in their own right. Thus under current rules, the trustees of a discretionary trust are liable to a 40% tax rate on any non-dividend income in excess of the standard-rate band. From 6 April 2011, this increases to 45%. Dividend income in excess of the standard rate band is presently taxed at 32.5% with a notional 10% tax credit. This means the trustees effectively pay tax at a rate of 25% on the net dividend they receive. Under current rules, on a net dividend paid to the trustees of £900, they will be liable for a further £225 in tax. From 6 April 2011, this increases to £275.