Discretionary Trust Tax Changes
Managing a discretionary trust comes with complex tax rules, and the recent Budget announcements mean some important changes are on the horizon.
We have provided a summary of the key changes below:
Discretionary Trust Income
The budget announced a 2% rate increase on dividends from 6th April 2026 which apply to the ordinary and higher rates only. No changes were made to the dividend trust rate of 39.35%.
From 6th April 2027, the tax rates on savings and property income received by discretionary trusts will increase by 2%. This means that the current trust rate of 45% for non-dividend income from discretionary trusts will increase to 47% where it relates to savings or property.
Chargeable Gains from Investment Bonds
Investment bonds are a popular option for discretionary trusts, partly due to the high rates of tax on other types of income, but also the administrative simplicity they provide. Trustees can make use of the tax deferred allowance to avoid triggering chargeable gains within the trust or can assign segments to beneficiaries prior to encashment. The Budget hasn’t impacted these tax planning strategies, but the taxation of bonds will change.
From 6th April 2027, changes to how savings income is taxed will affect the way investment bonds held within discretionary trusts are taxed.
Where a chargeable gain is taxed on the settlor or a beneficiary, any part of the gain that exceeds their savings allowances will be taxed at the new, higher savings rates.
- Offshore bonds will continue to grow without tax being deducted internally. When a gain arises, it will simply be taxed at the new savings tax rates.
- Onshore bonds will be affected by an increase in the tax paid within UK life funds. The internal tax rate on non-dividend income will rise to 22%, while dividends will remain tax-free.
- When a gain arises on an onshore bond, the individual will receive a 22% tax credit to reflect tax already paid within the fund.
- Basic rate taxpayers will have no further tax to pay.
- Higher rate taxpayers will pay an additional 20%.
- Additional rate taxpayers will pay an additional 25%.
- Top slicing relief will continue to be available for both onshore and offshore bonds. The rules have been updated so that, when calculating this relief, the tax treated as already paid will reflect the new tax rates.
What This Means for Trustees
These changes could impact trust distributions and investment strategies. Trustees should review their current arrangements and consider planning ahead to manage future tax liabilities.
If you would like to discuss anything raised in this article with one of the team, please do reach out.