Consultation outcome

Income Tax: Low income trusts and estates – summary of responses

Updated 15 March 2023

1. Executive Summary

1.1. A consultation ‘Income Tax: Low income trusts and estates’ was conducted between 25 April 2022 and 18 July 2022. The consultation sought views on legislative proposals to remove income tax liabilities from low-income trusts and estates. It also sought views on how the proposed design may impact on beneficiaries.

1.2. The government has announced at Spring Budget 2023 its intention to legislate the proposals outlined in the consultation document as part of a package of simplification reforms that:

• provide that trusts and estates with income up to £500 do not pay tax on that income as it arises. Where a settlor has made other trusts, the amount is the higher of £100 or £500 divided by the total number of existing trusts (subject to some exceptions)

• remove the default basic rate and dividend ordinary rate of tax that applies to the first £1,000 slice of discretionary trust income

• provide that beneficiaries of UK estates do not pay tax on income distributed to them that is within the £500 limit for the Personal Representatives

• make technical amendments to ensure for beneficiaries of estates that their tax credits and savings allowance continue to operate correctly

1.3. The first 3 changes will apply for tax year 2024 to 2025 onwards. The last change will apply for tax year 2023 to 2024 onwards.

1.4. The government wishes to thank all respondents for their contributions.

2. Introduction

The consultation

2.1. Trustees of trusts and personal representatives (PRs) of death estates do not have tax allowances in the same way as individuals do. As a result, trustees and PRs are required to file a self-assessment return in relation to small amounts of income.

2.2. In 2016, following tax on bank and building society interest no longer being deducted at source, HM Revenue and Customs (HMRC) introduced a narrowly targeted arrangement that removed trustees and PRs from income tax. It applies where the only source of income for the trust or estate is savings interest and the tax liability is below £100. It was intended to be a temporary arrangement pending a longer-term solution.

2.3. In order to bring certainty to taxpayers and their agents in this area, the government announced on 30 November 2021 that it would consult on formalising the arrangement, with its precise form and level being confirmed following consultation.

2.4. A consultation ‘Income Tax: Low income trusts and estates’ was conducted between 25 April 2022 and 18 July 2022. The consultation sought views on proposals and draft legislative clauses that would remove income tax liabilities from low-income trusts and estates. It also sought views on how the proposed design would impact on beneficiaries.

About the responses

2.5. During the consultation, HMRC held 2 meetings with interested parties. The first included representatives from HMRC’s Capital Taxes Liaison Group and Trusts and Estates Agent Advisory Group. The second meeting was with a specialist estate administration company.

2.6. The consultation received 16 written responses consisting of 5 from representative bodies, 7 from businesses and 4 from individuals. A list of respondents can be found in the Annex.

2.7. Some of the respondents’ experiences were limited to either trusts or estates and so they restricted their comments accordingly.

2.8. Some of the respondents made comments outside the scope of the consultation, including the process for the current HMRC arrangement; the merits of reforming how tax is collected where a beneficiary has an absolute entitlement to trust income; and, in relation to accumulation and discretionary trusts, mismatches between the 45% tax credit available to beneficiaries on an income distribution and income tax rates set by devolved administrations.

3. Responses

A: The proposal to legislate a de minimis system

Question 1 of the consultation asked: Bearing in mind that the proposals aim to reduce burdens on trustees and personal representatives of low-income trusts and estates, do you have comments on the proposal to legislate a de minimis system?

3.1. Respondents broadly welcomed the proposal to put the existing HMRC arrangement on a permanent footing and widen it to other sources of income, including dividends. They considered the proposed approach well-thought out and simple for PRs and trustees of low-income estates and trusts to understand and apply in practice.

3.2. Under the proposal, income tax becomes payable on the entire estate or trust income once the de minimis amount is exceeded. Nevertheless, respondents agreed that this outcome was outweighed by the benefit of avoiding the many complications that would otherwise arise if a tax-free allowance was adopted instead.

3.3. Some respondents made general comments on the need to periodically review the level at which the de minimis amounts are set so as to maintain their efficacy. Others made specific suggestions as to the level at which they should be set; and, in relation to trusts, commented on the practical interactions with the lower rates of tax that apply to the first £1,000 slice of income arising to accumulation and discretionary trusts.

3.4. Respondents thought the proposal would ease compliance burdens overall but that the primary benefit will be for PRs of estates. The benefits for trustees of trusts managing their tax obligations on a year-to-year basis were considered more limited, being dependent upon the nature of the trust as well as the amount of income that it receives or is entitled to.

3.5. Several comments were made in relation to circumstances where annual income fluctuates either side of the de minimis limit. Overall, it was noted that PRs and trustees may have a continued need to ensure they correctly notify HMRC when they are in receipt of chargeable income; or seek removal from self-assessment for tax years where income is below the de minimis amount. As such, some respondents thought that in some cases PRs or trustees may prefer to make self-assessment returns of their income, irrespective of whether there was a tax liability.

3.6. Respondents noted that trustees of accumulation and discretionary trusts will have continued obligations in connection with the administration of ‘tax pools’ even when their income is not immediately liable to tax when it arises (see also paragraphs 3.13 and 3.14 below).

3.7. Some respondents said that the work required to notify beneficiaries of the amount of tax credit available (if any) on distributions would be unchanged. However, statements may in future be issued later, once it is certain how much tax has been deducted.

3.8. Some thought that making income paid out from a de minimis estate tax-exempt in the beneficiaries’ hands would reduce the need to provide tax deduction certificates.

3.9. Some respondents asked for clear guidance that explains:

• how the proposals will work, including interactions with self-assessment notification requirements and the simplified informal procedure for estates in administration
• record keeping requirements
• interactions with trust registration rules, including whether trusts within the de minimis amount would be classed as ‘non-taxable’ trusts

B: The impact of a de minimis system on beneficiaries and settlors of trusts and estates

Question 2 of the consultation asked: Do you have comments on how a de minimis system may impact on beneficiaries and settlors of trusts or estates?

3.10. Some respondents made comments about the interaction between PRs or trustees and the beneficiaries or settlors of the estate or trust. These have been incorporated under question 1 above.

3.11. Of the respondents that commented on the impact on beneficiaries and settlors, there was agreement that the proposals would benefit those who would otherwise need to file a tax repayment claim. Those who already need to complete a personal tax return will see little administrative difference.

3.12. A small number of respondents suggested that, to better help beneficiaries understand their tax position, HMRC’s ‘R185’ forms should be amended so that where no income tax is deducted the income is reported gross.

C: Discretionary trust tax pool adjustments

Question 3 of the consultation asked: Do you have comments on the proposals for discretionary trust tax pool adjustments and interactions with the disaggregation rules?

3.13. Respondents largely saw tax pool ‘top up’ payments as a question of timing rather than a matter of principle. They thought the proposal that no tax is added to the tax pool where no tax is payable because of the operation of the de minimis amount was both logical and sensible.

3.14. Some respondents commented that the potential for a higher amount of tax to be payable on a distribution will require trustees to take extra care when deciding the size of a discretionary payment.

4. Next steps

4.1. Following consultation, the government has announced at Spring Budget 2023 its intention to legislate the proposals outlined in the consultation document as part of a package of simplification reforms.

4.2. These reforms will:

• provide that trusts and estates with income up to £500 do not pay tax on that income as it arises. Where a settlor has made other trusts, the amount is the higher of £100 or £500 divided by the total number of existing trusts (subject to some exceptions)

• remove the default basic rate and dividend ordinary rate of tax that applies to the first £1,000 slice of discretionary trust income

• provide that beneficiaries of UK estates do not pay tax on income distributed to them that is within the £500 limit for the PRs

• make technical amendments to ensure for beneficiaries of estates that their tax credits and savings allowance continue to operate correctly

4.3. To allow time for software providers to make appropriate adjustments, the first 3 changes will apply for tax year 2024 to 2025 onwards. The last change will apply for tax year 2023 to 2024 onwards.

4.4. In addition to legislating the proposals above, HMRC will also consider suggestions from respondents referenced in paragraph 3.9 for increased guidance on the reforms. HMRC will update their guidance and forms, including ‘R185’ forms as mentioned in paragraph 3.12, ready for use by taxpayers and their agents as appropriate.

Annex: List of stakeholders consulted

Responses were received from 4 individuals and the following organisations:

• The Association of Corporate Trustees
• The Association of Taxation Technicians
• The Chartered Institute of Taxation
• Colin Hutson Accounting Ltd
• Ernst and Young LLP
• Gerber Landa and Gee
• Kings Court Trust Ltd
• The Law Society of Scotland
• PricewaterhouseCoopers LLP
• QB Partners
• RSM UK Tax and Accounting Ltd
• The Society of Trust and Estate Practitioners