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The Dividend Changes – further details for Trusts and Estates

The introduction of the dividend allowance for individuals from April 2016 has left uncertainty for trust investors and those administering estates.

The introduction of the dividend allowance for individuals from April 2016 as reported in our previous article: 'Changes to Dividend Taxation', resulting in the removal of the dividend tax credit, has left uncertainty for trust investors and those administering estates. The draft Finance bill did nothing to clarify the position leaving many frustrated at the lack of detail.

However, whilst there seems to be no published information about how the new rules apply to dividends received by trusts after the 6 April 2016, there has been a small amount of commentary[1] on the subject. We envisage the proposals working in the following way.


All trusts – as was previously understood, no dividend allowance.


From April 2016 any dividend income received will first fall into the Trust’s £1,000[2] standard rate band (where available).  This income will not be subject to a zero rate of tax but will be subject to the “dividend ordinary rate” which is 7.5%, the dividend rate applicable for basic rate tax payers. Income received in excess of this will be taxed as currently, in line with the additional rate of tax for dividends applicable to additional rate tax payers, 38.1%.

When the trustees mandate income to the trust beneficiary, it loses its origin and is deemed to be trust income so the beneficiary cannot use any available dividend allowance they may have – even if the income originated from a dividend distribution.

Interest In Possession (IIP)

IIP trustees are liable for basic rate tax on income received and until the end of the 2015/16 tax year they have no tax liability in respect of dividends because they are received with the deemed tax credit.

From April 2016, with the abolition of the dividend tax credit, dividend income in the hands of trustees will be liable to tax at the dividend ordinary rate of 7.5% which is payable via self-assessment to HMRC. The underlying beneficiary, upon receipt of the net dividend, will then have to self-assess to determine whether they have a further tax liability depending on their personal tax position.  If the net dividend falls within their personal dividend allowance the beneficiary can re-claim the tax suffered.

IIP Trustees could potentially avoid any tax reporting by ensuring income is directly mandated to the beneficiary rather than passing through their hands. 

Absolute (Bare)

The changes will have no impact on absolute beneficiaries as any tax liability falls on them now and this will not change going forward. The beneficiary will be liable at their personal rate and can use any available dividend allowance.

Estates– the role of the executor

No dividend allowance available during the administration period.

Executors/Legal Personal Representatives (LPRs) are liable to income tax at basic rate during the administration of the deceased’s estate.  Whilst currently this means they generally do not have any further administration requirements because most income is received net, from April 2016 this will change. 

Executors will also be liable to tax at the dividend ordinary rate of 7.5%.  As dividend income will be received gross, the executors will have to declare their tax liability and pay the tax due.

And there’s more………..

Changes are afoot not only in respect of dividends but also in relation to interest received with the introduction of the Personal Savings Allowance and the abolition of the deduction of tax at source for bank and building society interest. 

Interest received in respect of cash holdings will be paid gross going forward, but IIP Trustees and Executors will need to account for basic rate tax and so will have greater reporting requirements. This is particularly frustrating for IIP Trustees as they will need to account for a 20% tax liability on interest received, even where the beneficiary is a non-taxpayer and will be able to re-claim the tax suffered.

[1] Technical Connection Ltd have provided comment on this area.

[2] Maximum of £1000 in total shared between the Discretionary Trusts established by the settlor to a minimum of £200 per trust. 

For financial advisers only. Not to be relied on by consumers.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth or Old Mutual International's interpretation of the relevant law and is correct at the date shown on the title page. While we believe this interpretation to be correct, we cannot guarantee it. We cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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