Getting Used to Dramatic Changes in the Taxation of Dividends
Last updated on September 25th, 2019 at 4:34 am
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.An example re changes to the taxation of dividends - helpful for #CII taxation and investment exams. Click To Tweet
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.
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Over to You…
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