Dividend tax changes to Finance Bill 2016

Fri 01 Jul 2016

Late changes to FB 2016, discussed in the Public Bill committee on 30 June, correct anomalies in the dividend tax rules as originally proposed. The effects of these late amendments are to make the new dividend rules work as one would have expected them to and largely as they were intended to. They are uncontroversial, reflect changes agitated for by the CIOT and other professional bodies, and have effect as from 6 April 2016.
Background
The Bill as introduced contained the main body of provisions introducing the new dividend tax régime which affects all UK-resident income tax payers, including individuals, partnerships, trusts and estates.
Individuals, including members of partnerships, have a £5,000 annual dividend allowance which is actually a nil-rate band applicable to dividends that are taxable because they are not covered by personal allowances or other reliefs or deductions.
A bigger change is the total abolition of dividend tax credits, replaced by specific dividend income tax rates. As well as the nil-rate which applies to the first (lowest) £5,000 of taxable dividends instead of any other tax rate, the rates are:
• 7.5% on dividends within the basic rate band;
• 32.5% on dividends within the higher rate band; and
• 38.1% on dividends within the additional rate band.
The latest changes
These changes, which all apply with effect from 6 April 2016, fill gaps and correct anomalies that were probably unintended,  unconsidered or resulted from, as David Gauke, The Financial Secretary to the Treasury put it, “ technical oversights during the drafting process”) in the original Bill. Yes, Minister.
Discretionary trusts’ tax pools
Under the previous rules tax credits were not repayable and could not be offset by trustees against the tax deductible at 45% when making payments to beneficiaries. Under the 2016 rules all tax paid by trustees of a discretionary trust will enter the tax pool and so will be:
• available as a credit against tax deductible on payments to beneficiaries; and
• reclaimable in full by beneficiaries as a reduction in their income tax and fully refundable.
Payments out of estates
The original wording of the Bill did not clearly entitle beneficiaries who received income from the estate during its administration to reclaim all the tax paid. Therefore amendments have been included to ensure that tax paid by the executors will be:
• available as a credit against tax deductible on payments to beneficiaries; and
• reclaimable in full by beneficiaries as a reduction in their income tax and fully refundable.
Partnership dividends
Income Tax Act 2007 s 856 dictates that investment income of a partnership is assessable on the individual partners in accordance with their partnership shares and based on the partnership accounting period, not the tax year.
Before 6 April 2016 this did not apply to dividends which were specifically excluded from the definition of investment income for s 856 purposes. That exclusion would have been abolished if the Bill had not been amended, changing the basis of assessment of dividends received by partnerships.
The amendment restores assessment of individual partners on the basis of dividends actually received in the tax year and ensures that the individual £5,000 dividend allowance is available against their shares of partnership dividends.