Trusts lose out under the new dividend nil-rate band rules

Trusts lose out under the new dividend nil-rate band rules

Mon 14 Dec 2015

The 9 December draft Finance Bill clauses include the long-awaited details of the dividend nil-rate band (DNRB) including the disappointing confirmation that there will be no tax credits or nil-rate allowance for trusts.
The £5,000, applicable in 2016/17, will apply to dividends received by individuals only (i.e. not trustees) from both UK resident and non-UK resident companies. The DNRB is not an exemption: it taxes the first £5,000 of dividends at 0%. The significance of this is that dividends within the DNRB nevertheless still count towards an individual’s basic or higher rate limits. The new Income Tax (Trading and Other Income) Act 2005 s 13A specifically refers to individuals and the draft Finance Bill clauses and draft schedules make no mention of any allowance for trusts or estates.
Incentive for trustees to mandate dividend income
Trustees receiving dividends will pay 38.1%, equal to the highest rate of income tax on dividends, and although all that tax will form a repayable credit when income is appointed to beneficiaries, the beneficiaries will not be able to use their personal dividend nil-rate band. That could mean tax exemption on £5,000 of dividends being lost. In such cases creating interests in possession and mandating dividends to the beneficiaries concerned, if they do not receive dividends in their own right, will reduce the overall tax burden.
Dividend maintained for non-residents
Tax credits on dividends will be abolished for all taxpayers except non-residents who are not liable to UK income tax (“eligible non-residents”). The retention of credits for non-residents means that they will still have UK tax credits available to set off against non-UK tax but these credits will not be.
Maintaining consistency in other areas
Another amendment maintains relief where a non-qualifying distribution is followed by a linked qualifying distribution. This is not supposed to bring about any material change 401, only to ensure that higher rate taxpayers who paid tax at higher rates on an earlier distribution consisting of e.g. redeemable preference shares are not doubly taxed when they receive a later distribution in respect of those shares.
This measure affects all company distributions made on or after 6 April 2016 including distributions deemed to be made to participators in close companies, e.g. on release of a loan from such a company.
The term “franked investment income” will disappear from the corporation tax acts with effect from 6 April 2016 as CTA 2010 s 1126 is repealed. This aligns the language of the legislation with reality because there will no longer be any dividend tax credit, even a notional one, to “frank” the dividend. Similarly the term “qualifying distribution” will also disappear (CTA 2010 s 1136 repealed). Both of those terms are replaced by a single generic definition of “non- CD distribution” in a new CTA 2010 s 1115 (7).

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