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Getting Used to Dramatic Changes in the Taxation of Dividends

Getting Used to Dramatic Changes in the Taxation of Dividends

This article discusses recent changes to the taxation of dividends. An example, showing the tax applicable to a discretionary trust, is included to aid CII R02, R03, R06, J02, AF1, AF4 or AF5 exam takers in their revision.

This article is relevant to examinable tax year 2016/17.

As everyone is aware the taxation of dividends changed dramatically in April this year; a £5,000 dividend allowance appeared and the 10% tax credit disappeared and we had to get used to some different tax rates as well.

What is important to note is that trustees do not receive a dividend allowance; although, the rates applicable to discretionary trust trustees are still as those for an additional rate taxpayer. They also still have a standard rate band of £1,000; this must be split between the number of trusts the settlor has set up (to a minimum of £200 per trust). For those trustees receiving dividend income up to £1,000, this is taxed at 7.5%. Any dividend income received above £1,000 is taxed at 38.1%. You should note, however, that the standard rate band is firstly set against any non-dividend income the trust may receive.

Example

A discretionary trust receives a dividend payment of £1,000. Assuming the standard rate band has been used by bank interest, the trustees will have to pay:

£1,000 taxed at 38.1% =£381

If the income was kept in the trust fund, then the net amount accumulated would be £619.

However, if the net income is paid out to a beneficiary, it gets slightly more complicated. The beneficiary would receive £550 with a tax credit of £450.

This is because the income stops being ‘dividend income’ and becomes ‘trust income’ meaning that the trustees are actually liable for 45% on £1,000 ie £450. From this, the trustees can deduct £381 already paid,  leaving them with extra tax to pay of £69.

Once the beneficiary receives the net income with tax credit, it then depends on their own income tax position as to whether they can reclaim all, some, or none of this.

Grab the resources you need!

If you’re studying for your CII R03 exam, and you want to walk into the exam room with an air of confidence, you’ll need to be well prepared. Grab our free taster to try out one of Brand Financial Training’s mock papers for yourself.  Click the link to download the R03 mock paper taster now!

Click here to download our free taster mock paper for CII R03

Alternatively, you can download taster resources for R02, R06, J02 AF1, AF4 or AF5 if one of those exams is the source of your worry.

Over to You…

Would you feel confident in answering exam questions regarding the taxation of dividends?