Understanding the 2023 Budget: Trust Rate Increase
The recent budget announcement for 2023 has introduced significant changes to trust taxation, particularly in relation to the trust rate. As we delve into the details, it is essential for individuals with trusts to assess the impact of these changes and reevaluate whether trust continues to be the right choice for their financial planning.
The Trust Rate Increase: Effective from 1st April 2024, the government has announced an increase in the trust rate from 33% to 39% for income earned in the 2024-25 financial year and beyond. This adjustment aligns with the introduction of the 39% top personal tax rate, with the objective of minimizing incentives for taxpayers to utilize trusts as a means to avoid higher personal tax rates. The decision follows advice from Inland Revenue, emphasizing the need for parity between the personal and trust tax rates.
Implications and Compliance Costs: The amplified trust rate, coupled with the increased compliance costs brought about by the trust disclosure rules and the Trustee Act 2019, is expected to have a significant impact on trust utilization. The higher tax burden and additional administrative requirements may prompt individuals to reconsider the advantages of using trusts as wealth management tools. As a result, we can anticipate a potential decline in the popularity of trusts in the coming years.
Concessions for Specific Beneficiaries: Despite the trust rate increase, the government has incorporated concessions to address specific beneficiary circumstances. These concessions provide more tailored tax treatment in the following scenarios:
Deceased Beneficiary Concession: Trustees now have the option to tax trustee income at individual marginal tax rates when derived within 12 months of the date of death. This concession aims to offer flexibility and alleviate the tax burden during the transition period following the passing of a trust's primary beneficiary.
Disabled Beneficiary Concession: Under this concession, trustee income can be taxed at the personal tax rate of a disabled beneficiary. To qualify, the trust must fulfill certain requirements, such as ensuring that the disabled beneficiary is the sole individual eligible to receive distributions unless they have passed away and the distribution is part of the trust's dissolution. Disabled beneficiaries are defined as individuals who receive a Supported Living Payment on the ground of restricted work capacity or a Child Disability Allowance, either for the entire income year or a portion thereof.
Reflecting on the Relevance of Your Trust: In light of the trust rate increase, the evolving regulatory landscape, and the concessions introduced, it is crucial for individuals with trusts to engage in self-reflection. Ask yourself: Why do you have a trust? Are the associated benefits still significant given the changing tax landscape and potential decline in trust popularity? It is wise to assess whether your trust aligns with your current financial goals and circumstances.
Ask yourself: Why do you have a trust? Is the trust still the right choice for you? Come have a chat with us if you have any questions regarding your trust.