Trustees are being urged to make greater use of offshore bonds ahead of a 10% hike in both their UK income and dividend tax rates from April 2010.
The new 50% higher rate of income tax that kicks in on earnings over £150,000 also applies to discretionary trusts – though there is no £150,000 threshold – while their dividend income rate rises from 32.5% to 42.5% from April 2010.
Louise Somerset, tax director at RBC Wealth Management, said: “Discretionary trusts will be particularly hard hit by the rate increases, as they will be liable to the new 50% on all trust income above the standard rate band (currently £1,000).
"This will include Will trusts and both onshore and offshore trusts, though UK source only. Beneficiaries of life interest trusts are liable to tax on their income entitlement at their personal rates.”
Tax deferral
Offshore life companies say the higher rates make for a compelling argument for trustees to wrap investments in offshore bonds, which benefit from a 5% tax-free annual withdrawal facility, the ability to assign the bond to another, lower rate, taxpayer and tax deferral.
Margaret Jago, technical manager, Aegon Scottish Equitable International, said: “People likely to pay tax at the 50% rate may wish to consider wrapping their investment assets into offshore bonds to take advantage of the fact that they can defer personal tax liabilities on their investment income until a point where they are no longer paying tax at the top rate of 50%.”
Julie Hutchison, head of estate planning, Standard Life International, said HMRC data showed 116,000 trusts fell into new higher rate category in the 2006/07 tax year.
“This increase in trust tax rates is not good news for discretionary trusts, but trustees holding investment bonds will however be pleased to enjoy tax deferral of an even bigger amount of tax from next year.”
