Estates in administration and trusts
Published 15 March 2023
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Who is likely to be affected
Trustees of trusts and personal representatives (PRs) dealing with deceased persons’ estates in administration, and beneficiaries of estates.
General description of the measure
This measure:
- provides that trusts and estates with income up to £500 do not pay tax on that income as it arises;
- removes the default basic rate and dividend ordinary rate of tax that applies to the first £1,000 slice of discretionary trust income;
- provides that beneficiaries of UK estates do not pay tax on income distributed to them that was within the £500 limit for the PRs; and
- makes technical amendments to ensure for beneficiaries of estates that their tax credits and savings allowance continue to operate correctly.
Policy objective
This measure provides certainty and simpler tax administration for trusts and estates by legislating and extending an existing concession.
Background to the measure
Between 12 April 2022 and 18 July 2022, HMRC consulted on proposals to formalise and extend a concession that removes trusts and estates from income tax where the only source of income is savings interest and the tax liability is below £100; and on related reforms relating to low income trusts and estates.
Detailed proposal
Operative date
The measure’s main changes will have effect for tax years 2024-25 onwards.
The technical amendments to ensure an estate beneficiary’s tax credit and savings allowance continue to operate correctly will have effect for tax year 2023-24 onwards.
Current law
Section 23 of the Income Tax Act (ITA) 2007 concerns calculation of income tax liability.
ITA 2007, section 491 provides that for accumulation and discretionary trusts the trust rate and dividend trust rate of tax does not apply to the first £1,000 slice of income for a tax year. Where a settlor has made more than one trust, section 492 of ITA 2007 reduces the amount of income to which section 491 applies in proportion to the number of current trusts to a minimum of £200.
Chapter 6 of Part 5 of the Income Tax (Trading and Other Income) Act (ITTOIA) 2005 (sections 649 to 682A) and Chapter 3 of Part 10 of the Corporation Tax Act (CTA) 2009 (sections 934 to 952) set out the charges to income tax and corporation tax on income payable to beneficiaries of a deceased person’s estate.
Proposed revisions
Legislation will be introduced in Spring Finance Bill 2023 to insert a new section 24B into ITA 2007 that amends Step 2 at section 23 so that where the “net income” of trustees or PRs is £500 or less it is treated as being £0. Where net income exceeds £500, there is no change to the amount determined at Step 2.
Where a settlor has a number of current trusts, this £500 limit will be proportionately reduced for accumulation and discretionary trusts, in a similar way to section 492 of ITA 2007, by the total number of the current trusts to a minimum of £100. To make this rule fairer and simpler to apply, interest in possession trusts, settlor-interested trusts, vulnerable beneficiary trusts and heritage maintenance trusts will not be taken into account.
The measure has no effect on additional income tax payable under Step 7 at section 23, such as tax pool adjustments as a result of discretionary payments made by trustees.
The measure will also repeal sections 491 and 492 of the Income Tax Act 2007.
ITTOIA 2005, Part 5, Chapter 6 and CTA 2009, Part 10, Chapter 3 will be amended so that where the “net income” of a UK estate is treated as being £0, as above, that income will not be chargeable to income tax when it is received by the estate beneficiary.
Amendments will also be made to provide that the income received by an estate beneficiary is savings income where it was savings income of the PRs; and clarify that an estate beneficiary’s gross taxable income and tax credit should reflect the tax previously paid by the PRs.
Summary of impacts
Exchequer impact (£m)
| 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 | 2027 to 2028 |
|---|---|---|---|---|---|
| — | — | Nil | +15 | +10 | +10 |
These figures are set out in Table 4.1 of Spring Budget 2023 and have been certified by the Office for Budget Responsibility. More detail can be found in the policy costings document published alongside Spring Budget 2023.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
This measure is expected to affect an estimated 37,000 individuals each year who are beneficiaries of trusts or estates.
For beneficiaries of interest in possession trusts (ones where the beneficiary has an absolute entitlement to the trust income) and settlors of settlor-interested trusts (ones where, broadly, the settlor has not been excluded from benefit) there will no longer be a tax credit attached to trust income where the trust is not taxed because of the new £500 limit. For non-taxpayers this will remove the need to make tax repayment claims. For other taxpayers there will be an additional amount to pay and tax returns may need to be made when that was not previously the case.
There will be no impact on beneficiaries of discretionary trusts.
Estate beneficiaries will not need to report income tax where the PR’s £500 limit applied to the income, or they have available savings allowance to apply against distributed savings income.
This measure is not expected to impact family formation, stability or breakdown.
Equalities impacts
It is not expected that there will be adverse effects on any group sharing protected characteristics.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on an estimated 62,000 professional and lay trustees and PRs and persons acting in an advisory capacity. One-off costs will include familiarisation with the change and could also include upskilling staff and updating software. There are not expected to be any continuing costs.
The measure is expected overall to improve businesses’ customer experience, with ongoing savings, in the long term as businesses may no longer have to file returns as professional trustees, PRs or on behalf of clients.
This measure is not expected to impact civil society organisations.
Operational impact (£m) (HMRC or other)
This measure will require changes to trust and estate returns, Income Tax calculations and guidance.
The financial consequences of this submission for HMRC are IT costs in the region of £1.18m.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through the monitoring of tax returns and communication with affected taxpayer groups such as the Trusts and Estates Agent Advisory Group and HMRC’s Agent Forum strand for trusts and estates.
Further advice
If you have any questions about this change, please email: [email protected].