Abstract

This article analyses the proposed income tax changes introduced by the 2008 Budget and the likely impact of those changes on trustee investments. It assesses the tax treatment of investment bonds, segmentation and the opportunity in the current economic climate for trustees to reassess their investment strategies. As if the role of the trustee was not difficult enough, in the Pre-Budget report in November 2008, the Chancellor announced the proposed increase in income tax rates from the tax year 2011/12. The actual budget revealed the true extent of the increases and also a shorter time frame before these changes take effect, certainly adding to the trustees’ load. His increase in the income tax rate to 50 per cent for those individuals with income of more than £150,000, brought with it a commensurate increase in the trustees tax rate which applies to income from the tax year 2010/11. Rather harshly, the increase for trustees is significantly worse than for highly paid individuals and is further evidence of the Government’s dislike of trusts by disproportionately penalizing them. The increase for trustees is significantly worse than for highly paid individuals For individuals, the increased rate will apply to income above the £150,000 threshold, whereas for trustees of discretionary trusts, it will apply to all income above the standard rate band, currently £1000. This disparity between the taxation of individuals and trusts does seem unfair when lined up together and will have significant impact on affected trusts. Changes in tax rates This trustees’ income tax rate rise from 40 to 50 per cent gives the Chancellor an increase in the tax take of 25 per cent from this source assuming he does not increase the standard rate band for trusts. Dividend income is also affected; the increase from 32.5 per cent tax to 42.5 per cent represents a further 30 per cent increase in the tax take for the Chancellor. This represents a significant tax feast for the Government without too much political damage. Let’s look at some examples of how the changes will work, assuming income received is above the £1000 standard rate band. Trustees will normally receive deposit interest after a deduction of 20 per cent tax, so a payment of £1000 to the trustees would be grossed up by the 20 per cent tax credit to calculate the tax due, a gross figure of £1250. With tax due of £625.00 and a tax credit of £250.00, trustees pay an amount of £375.00 to HMRC, leaving the sum of only £625.00 for distribution to

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