Tax and Trusts Spring Update

Personal Taxes

Firstly, the things staying the same:

During Rishi Sunak’s time as the Chancellor of the Exchequer, the government had previously announced intentions to freeze personal allowance and the higher rate of tax thresholds for four years. In November 2022 however, it was announced that this would remain in effect for an additional two years until the end of the 2027/28 tax year.

Personal Allowance (the level of income at which no income tax is payable) and the higher rate threshold (the level at which income tax is levied at 40%) remain unchanged at £12,570 and £50,270 a year respectively.

The extension to fixed rates on income tax allowances was also extended to include the inheritance tax nil-rate band which will now also remain at £325,000 until 2027/28.

In October 2022, Jeremy Hunt cancelled plans for a reduction in dividend tax rates resulting in the levels remaining at the following levels for the current tax year:

A few of the changes to be aware of:

The additional rate threshold for income tax has been lowered from £150,000 to £125,140 to be brought in line with the personal allowance taper. This means at the point that you begin to pay 45% rate of tax; you will also no longer have the benefit of any personal allowance which reduces by £1 for every £2 of income above £100,000.

Though the rates of capital gains have remained the same for many years, the government has now reduced the annual exempt amounts, that you can gain before having to pay tax, by over half from £12,300 to £6,000 in the current tax year, 2023/24. From April 2024, this will halve again to £3,000 and is expected to remain fixed at this level.

In a similar vein, the dividend allowance has also been halved from £2,000 to £1,000 for the current tax year and will also halve again from April 2024 to £500. It is currently unclear whether this will reduce further following the 2024/25 tax year.

Finally, everyone’s favourite topic: pensions! During the most recent Spring Budget, rather than announce more cuts, the chancellor of the exchequer announced that as of 6 April 2023: UK taxpayers will be able to benefit from a huge 50% increase in the annual allowance from £40,000 to £60,000, which was accompanied by an even bigger rise in the minimum amount of reduced annual allowance being increased from £4,000 to £10,000. Should you be fortunate to have earnings in the region of £200,000 or more this may be particularly relevant to you in terms of the increased amount of tax relief now available. Furthermore, increased pension contributions have long been a staple in estate planning as pensions are, broadly speaking, outside of your estate for inheritance tax purposes. The cap on the lifetime allowance, which had been £1,073,100 in the 2022/23 tax year, has also been removed, potentially negating a 55% tax charge for those affected.

(Pensions can be a very complicated topic. Please get in touch for further advice and/or bespoke specialist estate and tax planning and if we can’t help you, we can point you in the direction of someone who can).

Trust & Estates Taxation

Unfortunately, the changes to taxation described above have already come into effect as of 6 April 2023 so that does not leave much in the way of opportunity for planning. However, for Trusts, the changes announced at the 2023 Spring budget are not to come into effect until April 2024.

The changes are broadly a simplification to the taxation of trusts and estates and though will apply to all trusts and estates, will be of particular interest to those who fall into the government’s definition of ‘low-income trusts and estates’.

From 6 April 2024, there will no longer be a reporting exemption for trusts and estates with only savings income with a tax charge of £100 or less. Rather this will be replaced with a £500 limit that includes all income. Where a trust or estate has income of £501 or more, the entire amount will be taxable and not just the excess. This means that no R185 will be issued for beneficiaries to claim a tax credit where trust and estate income is less than £500, as there would have been no tax suffered by the trust or estate.  There are special considerations required where a settlor has created multiple trusts.

Additionally, there is now no longer a reduced rate of tax paid on the first £1,000 of income and all income (subject to being above the new £500 limit) will be taxable at the rates applicable to trusts of 45% for non-savings income and 39.35% on dividend income.

Similarly to individuals, the Capital Gains Tax annual exempt amount for trusts has fallen from £6,150 to £3,000 for the current tax year and will halve again from April 2024 to £1,500 where it too is expected to remain fixed.

The government has made their intention known that they will be making changes to both Agricultural Property Relief and woodlands relief for UK property and Greenwoods will be following this closely to update our clients where necessary when the scope of the changes has been announced.

If you would like to find out how any of the above may affect you in further detail, or to find out if a trust is right for you and your estate planning, please get in touch with one of the members of our Wealth Preservation team and we would be happy to assist.