This change is to take effect from 1 April 2024 and would align the rate at which trustee income is taxed with the top tax rate applicable to individuals. The change is intended to prevent taxpayers from achieving a 6% tax saving by accumulating income within a trust, rather than distributing the income to individual beneficiaries who are on a 39% tax rate.
The proposed tax rate increase brings into focus the question of whether trusts will remain useful asset planning structures. There are a number of reasons why trusts are useful asset planning structures, even in the face of an increase in the trustee tax rate.
These include:
- Income splitting: Use of trusts for income splitting purposes will remain relevant following the proposed trustee tax rate increase. It would still be possible in many cases to distribute certain income to beneficiaries on a 33%, 30%, 17.5% or 10.5% tax rate. Note that income splitting through a trust is only possible for income derived from assets – personal services income earners are unable to use a trust structure for this purpose.
- Creditor protection: Assets held in a family trust are ordinarily protected from any claims by personal creditors of the beneficiaries, unless the assets are settled on the trust with an intention to defraud the creditors.
- Setting aside income or assets for specific purposes: A trust can be a good way to set aside money or assets for a specific purpose, such as a child’s future education, as the trustees will have control over the assets, rather than the beneficiary that the assets or income are intended to benefit. A trust may also provide a useful vehicle for protecting specific assets, such as a family home, to ensure they can be passed down through generations.
- Protecting property against estate claims: Trusts can be useful as a way to protect against estate claims after death. While assets held in your own name can potentially be subject to claims by family members under the Family Protection Act 1955, there is no power under that legislation for a court to rewrite the terms of a trust.
Further information on these potential benefits can be found in our newsletter Family Trusts: Is a trust right for you?
It is important to note that establishing a trust carries with it a range of responsibilities that are imposed on the trustees.
These include:
- adhering to the trustee duties that are now enshrined in the Trusts Act 2019;
- provision of trust information to beneficiaries;
- keeping trust records; and
- if the trust derives income, filing an annual return with IRD which includes financial statements, information about settlements and distributions and certain other information (unless one of the exceptions to filing an annual return applies).
Further information on the responsibilities imposed on trustees can be found in our The Big Picture document, New rules for trusts: A toolkit for trustees.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully adviser.