What do dividend tax changes mean for trustees?

From 6 April 2016 dividends paid by UK companies and UK authorised mutual funds (i.e. Unit Trusts and OEICs) that are taxed as dividends (i.e. 40%+ invested in equities) no longer come with the non-reclaimable 10% tax credit.

However, individuals will in future get a £5,000 dividend allowance, meaning dividends up to this amount will be tax-free and for any dividends in excess of this amount, the dividend tax rate will be increased by 7.5%.

But what do dividend tax changes mean for trustees?

Well, bad news actually, because thousands of trusts exist in the UK and many hold investments in equities – either direct shareholdings or via mutual funds.

Therefore, trustees must be fully informed of the dividend tax changes and the impact on their trusts, especially given that the dividend tax changes for trustees of discretionary trusts are less favourable because:

 The non-reclaimable 10% dividend tax credit has been scrapped;
  • They do not get the new dividend allowance of £5,000pa;
  • Dividends received within the £1,000 starting rate band will be taxed at 7.5%; and
  • Dividends in excess of this will be taxed at the increased rate of 38.1% (from 30.56%).

The combined result of these changes is that trustees will be 10.8% worse off on accumulated income in the trust as follows:

Tax year 2015/16 2016/17
Net dividend received £900 £900
Dividend tax rate 30.56% 38.1%
Tax to pay £275 £342.90
Net income in trust £625 £557.10


How many trustees would be happy with c.11% reduction in accumulated income? The key point here being, that if trustees are not aware of the changes and impact, then they won’t realise the increase in tax until their tax return the following year when of course it’s too late to do anything about it!

As far as interest in possession and absolute trusts are concerned, income is taxed on the beneficiary, so the personal dividend tax changes apply. For settlor-interested trusts, income is assessed on the settlor and tax can be reclaimed.

But what if trustees decide (or have) to distribute income to the beneficiaries?

Well currently, this has always been bad news because trustees have had to account for a full 45% tax on the trust income distributed (so beneficiaries can recover the difference between the tax withheld and their marginal rate), but are not allowed to offset the 10% tax credit, creating an effective double taxation rate of 50.5%. But now the tax credit has been scrapped, does it make any difference?

Continuing the previous example:

Tax year 2015/16 2016/17
Amount to be distributed

(i.e. net dividend)

£900 £900
Distribution tax rate 45% 45%
Tax due on distribution £405 £405
Less tax to already paid £275 £342.90
Tax to pay £130 £62.10
Net distribution out £495 £495


While beneficiaries receiving distributions will be in the same position as before, they will not be able to use their personal dividend allowance, as they will be receiving trust income rather than dividend income.

What’s The Solution?

Well for many years now, trustees have used investment bonds for a variety of reasons: they are a non-incoming producing asset; allow 5% tax-deferred withdrawals; the ability to assign to a lower tax rate beneficiary; no ongoing tax liability or tax return until a chargeable event occurs; and if the settlor is still alive any tax is at the settlors marginal tax rate not the trustees… and so on.

However, these changes now firmly favour the use of onshore investment bonds, because HMRC has confirmed that the dividend tax changes will not affect the taxation of dividends received by life company policyholder funds. In other words, dividend income continues to be exempt from tax under onshore bond life funds investing in equities (and don’t forget that capital gains continue to benefit from indexation relief).

So where trustees are receiving dividend income (or for that matter, other tax paying investors in excess of their dividend allowance) then onshore bonds investing in equity funds, not only look more attractive than directly-held equity funds, but also more attractive than offshore bonds investing in equity funds (although there are other reasons why offshore bonds may be used by trustees).

Note – the split between dividend income and capital growth, the level of inflation, future (lower) corporation tax rates in life funds, whether trustees have their (half) CGT exemption available and the impact of gross roll-up in an offshore bond, could all make a difference.

While trustees have always had a fundamental duty of care to act in the best interests of all beneficiaries, the Trustee Act 2000 introduced a number of new duties on trustees (of all trusts), including the need for diversification and suitability of investments and specifically, the requirement to obtain and consider proper advice when making or reviewing investments (on a regular basis), which should include any taxation changes!

Of course, tax must not be the only consideration when advising trustees, but there is now a great opportunity for advisers to work with trustees and other professional connections (accountants and solicitors), to make sure they are fully aware of the impact of the dividend tax changes and the potential solutions to help maximise the tax efficiency of the investments they are responsible for.



Source: Andy Woollon – Zurich