Taxation of trusts—investment income
Produced in partnership with Paul Davies of Clarke Willmott
Taxation of trusts—investment income

The following Private Client guidance note Produced in partnership with Paul Davies of Clarke Willmott provides comprehensive and up to date legal information covering:

  • Taxation of trusts—investment income
  • Interest
  • Dividends and company distributions
  • Insurance bonds
  • Trust receiving estate income

This Practice Note highlights some features of the taxation of investment income which apply specifically to both discretionary and interest in possession trusts.

Interest

Before 6 April 2016, interest received by trustees was subject to the same arrangements for deduction of basic rate tax at source, as that received by individuals. Trusts subject to standard rates of tax had no further liability beyond the 20% deducted at source. After that date, interest is to be paid without deduction of tax.

Trustees are not entitled to the savings allowance introduced by section 4 of the Finance Act 2016 whereby individuals may receive up to £1,000 of gross interest to be charged at a nil rate. Consequently, with the abolition of tax deduction at source, trustees will be required to file a tax return to pay a tax liability on very small amounts of interest received.

HMRC has recognised that the new regime will impose an additional administrative and financial burden on trustees. As a temporary measure, initially for 2016–2017 only, HMRC announced that trustees need not declare and pay tax on interest where the only source of income is savings interest and the tax liability is less than £100. These arrangements have been extended to subsequent tax years and remain in force for the 2020–21 tax year. See HMRC Trusts and Estates newsletter: April 2016