Investment income

Produced by Tolley
Investment income

The following Trusts and Inheritance Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Investment income
  • Introduction
  • Interest
  • Accrued income scheme
  • Dividends and company distributions
  • Stock or scrip dividends
  • Accumulation units in open-ended investment companies (OEICs)
  • Insurance bonds
  • Trust receiving estate income

Introduction

This guidance note highlights some features of the taxation of investment income which apply specifically to trusts.

Interest

For commentary on what constitutes interest and how it is taxed, see the Interest received net or gross guidance note in the Personal Tax module.

Up until 5 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 FA 2016, whereby individuals may receive up to £1,000 of gross interest to be charged at a nil rate. Consequently, following the abolition of tax deduction at source, trustees became technically liable to file a tax return to pay a tax liability on very small amounts of interest received. In recognition of the additional administrative burden on trustees, and indeed on their own resources, HMRC introduced a non-statutory arrangement under which trustees need not declare and pay tax on interest where the only source of income is savings interest and the tax liability is below £100 .These arrangements, originally introduced as a temporary measure for 2016/17, have been extended periodically up to 2020/21, subject to longer term review. See HMRC Trusts and Estates newsletter: April 2016, December 2017, August 2019.

Note that trustees cannot own individual savings accounts (ISAs).

Discretionary and accumulation trusts are liable at the trust rate of 45% on interest. See the Discretionary trusts ― income tax guidance note. Where 20% tax has been deducted at source, they have an additional tax liability of 25% of the gross income. The whole 45% becomes available for repayment by entering the tax pool. See the Discretionary trusts ― tax pool guidance note.

Accrued income scheme

The accrued income scheme applies to interest-bearing securities such as gilts and company loan

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