Low income trusts and estates

Written by James Murray on 10th May 2024 | 8 minute read

The Spring Budget 2023 laid out several changes to income taxation for low-income trusts and estates. Read on to learn how this may affect you.

Overview of changes

Low-income trusts and estates are those in which income is treated as exempt if it is below the low-income threshold.

The Spring Budget 2023 proposed several changes to the taxation of income for low-income trusts and estates. These changes were enacted by Finance Act (No.2) 2023 and came into effect from 6 April 2024 onwards. The changes impact trusts and estates and have knock-on effects on their beneficiaries.

The intention of these changes was to simplify tax reporting obligations for personal representatives and trustees of low-income trusts and estates going forward .

Impact of Changes to Low Income Trusts

In the tax years leading up to and including the year ending 5 April 2024, trusts were treated as low-income trusts for a tax year if their savings income was less than £500. If the trust had any non-savings or dividend income, then it would not be a low-income trust.

Starting from 6 April 2024, a trust is treated as low-income in a tax year if its total net income is less than £500. This is an all-or-nothing treatment; therefore, if the net income is above £500, then all the net income is charged to income tax.

Starting from 6 April 2024, an estate is treated as low income for a tax year if the total net income in the year is less than £500. This is an all-or-nothing treatment; therefore, if the net income is above £500, then all of the net income is charged to income tax in that year.

A restriction to the £500 low-income threshold applies for trusts subject to the trust income tax rates, which are currently 45% for savings and non-savings income and 39.35% for dividend income.

The restriction is calculated by dividing the £500 threshold by the number of trusts created by the same settlor, which are:

subject to trust income tax rates, and
that still exist in the tax year, and
have any income in the tax year.

The maximum restriction is £100 per trust.

Trustees will need to assess each year if their trust is a low-income trust. If it is, they will not need to submit a tax return for that year, assuming there is no other reason to do so. There may be years where the trust does not qualify as a low-income trust, in which case the trustees would need to submit a tax return for the year.

Trusts subject to the trust income tax rates have tax pools to record income tax paid by the trustees. When payments are made to beneficiaries, 45% tax credits are attached, reducing the amount of the tax pool.

Trustees of low-income trusts will therefore need to pay tax on distributions of ‘low’ income to make up the tax credits being taken out of the tax pool.

In addition to the changes above, the basic rate and dividend ordinary rate of tax that applied to the first £1,000 of income for trusts subject to the trust income tax rates has been removed. These changes also came into effect from 6 April 2024 onwards.

Beneficiaries of low-income trusts

Beneficiaries of low-income trusts subject to the trust income tax rates will continue to benefit from the 45% income tax credits as they did before.

Beneficiaries of other low-income trusts, such as interest in possession trusts or settlor-interested trusts, will still be liable to income tax on their entitlements to income or receipts of income distributions. In these cases, if the trust is a low-income trust for a given year, the beneficiary will need to report the gross income, since no tax will have been paid by the trust.

Impact of Changes to Low-Income Estates

In the tax years leading up to and including the year ending 5 April 2024, estates were treated as low-income estates if savings income for the whole period of administration was less than £500, and there was no other type of income. If the estate had any non-savings or dividend income, then it would not be a low-income estate.

For estates in administration before and after the changes, the old rules will apply until 5 April 2024, and the new rules will apply starting from 6 April 2024.

Personal representatives of estates can informally report estate income to HMRC by letter instead of submitting tax returns in certain circumstances. In such circumstances, if the estate is a low income estate for a tax year, the personal representatives would not need to report the income for that year to HMRC.

Beneficiaries of low-income trusts

Previously, beneficiaries would need to report any gross income received from low-income estates where tax was not paid by the estate.

From 6 April 2024, estate income treated as exempt for a given year will now be exempt in the hands of beneficiaries when the income is distributed to them.