Tax Talk: What you need to know about the trust tax rate increase to 39%

Inland Revenue has released a rare “General Article” in relation to the planned increase of the trustee tax rate to 39%.

Time to read: 3 mins

The Bill increasing the tax rate on trustee income from 33% to 39%, with effect from 1 April 2024, was reintroduced late last year by the present Government. Although still in Bill form, it is expected to be law by the end of March. 

The increase in the trustee tax rate to 39% has given rise to much interest in restructuring and other activities to reduce exposure to the new rate (which is designed to be the same as the top rate applying to individuals).

Several scenarios have brought concern to some tax commentators as they could be seen as tax avoidance. In the “General Article”, Inland Revenue has commented on several scenarios, all of which are applicable to straightforward situations, but may not apply where there is an element of artificiality or contrivance

A company is owned by a trust and changes its dividend-paying policy

For example, paying a higher dividend than normal to be taxed at 33%, rather than 39% if paid after 1 April 2024. In most cases this would not be tax avoidance. However, it could give rise to concerns where a dividend has been paid by crediting shareholder current accounts, but the company objectively has no real ability to pay those credit balances if it were to be liquidated. 

A trustee distributes income to a beneficiary so it is taxed to the beneficiary rather than at the trustee tax rate 

This should not be tax avoidance but could heighten concerns where, in reality, the beneficiary is not entitled under the trust or will not benefit from the distribution. 

A trustee adopts a company structure and transfers its income-earning assets to the company 

This means company tax of 28% applies to the income rather than the new 39% trust tax rate, however there would be a top-up when the company distributes profits to the trust. Inland Revenue is comfortable this is unlikely to be tax avoidance but could create concerns where a holding company is interposed between an existing operating company and trust, or where personal services income is diverted by structuring revenue-earning activities through a company. 

A trustee chooses to wind up the trust

This should not be tax avoidance.

A trustee chooses to invest in a portfolio investment entity

This should not be tax avoidance.

Further scrutiny

Inland Revenue has also suggested the following situations might give rise to further scrutiny:

  • Allocating income to a beneficiary taxed at a lower rate under an arrangement in which that amount is resettled back on the trust.
  • Allocating income to a beneficiary taxed at a lower rate by crediting the beneficiary’s current account where the beneficiary has no knowledge of the allocation or no expectation of receiving the income.
  • Replacing dividend income with loans in an artificial manner such that the loans do not reflect the reality of the arrangement.
  • Artificially altering the timing of any taxable or deductible payment.
  • Creating or increasing income or expenditure that does not reflect the reality of the structure or arrangement.

Comment

Much could be read into the fact this article was released on a Friday afternoon before a de facto long weekend where the attention of many was directed elsewhere.

It once again emphasises that Inland Revenue is interested in transactions with artificial or contrived features, but accepts that undertaking some actions because it gives a better tax result can be permissible. Given the line between a legitimate transaction and tax avoidance is thin, we would strongly recommend contacting your Baker Tilly Staples Rodway advisor if you are considering clearing retained earnings, changing a dividend distribution policy or anything significant involving a trust in advance of 31 March.

DISCLAIMER No liability is assumed by Baker Tilly Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this website. It is recommended that you consult your advisor before acting on this information.

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