The Chancellor announced the following measures on Trusts, Estates and Inheritance Tax (IHT) in his Spring 2023 Budget.
It is proposed that from 6 April 2024:
- Trusts and estates with income up to £500 will not pay any tax on that income as it arises.
- The default basic rate and dividend ordinary rates of tax that apply to the first £1,000 of discretionary trust income will be removed.
- Beneficiaries of UK estates receiving distributions of income within the above £500 limit will not pay tax on that income.
Exemption from income tax for low-income trusts and estates
From 6 April 2024
- Tax trusts and estates with income below £500 will no longer be subject to Income Tax, raising the previous £100 exemption.
- This is an all-or-nothing relief: if the estate or trust has income of £501 the whole amount will be taxable and not just the excess over £500.
- Where a settlor has a number of discretionary and accumulation and maintenance trusts the £500 limit will be split amongst those trusts but with a minimum level per trust of £100. Other non-discretionary trusts settled by the same individual such as interest in possession trusts will not be taken into account here.
- Despite not being able to receive a tax credit in respect of income distributed to them within the £500 limit, as would normally be the case with the provision of form R185, estate beneficiaries will also be exempt from tax on this income. Future technical amendments to the legislation will be made to allow this to apply to beneficiaries.
- Policy paper: Simplifications for trusts and estates
Removal of default rate for first £1,000 of discretionary trust income
The current standard rates for the first £1,000 of discretionary trust income are:
- 8.75% for dividends.
- 20% of all other income.
From April 2024 all income including the first £1,000 will be taxable at the following rates:
- Dividend income: 39.35%.
- All other income: 45%.
Other proposed measures
It has also been announced that:
- HMRC will make changes to Inheritance Tax Regulations during 2023-24 to remove some non-taxpaying trusts from reporting requirements. No further details have yet been released about this.
- The government intends to restrict the scope of Agricultural Property Relief (APR) and woodlands relief to property in the UK. This will result in a property located in the European Economic Area (EEA), the Channel Islands and the Isle of Man being excluded from these reliefs from 6 April 2024.
- The government will consult on the taxation of ecosystem service markets and the potential expansion of APR to cover certain types of environmental land management.
Useful guides on this topic
Budget 2023: At a glance
Freeview summary of the measures announced in the Budget 2023
Policy paper: Simplifications for trusts and estates