The new Government has indicated that it will proceed with the 39% trustee tax rate change. The draft legislation is contained in the Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill introduced in May last year by the previous Government. The Bill has this change applying from the start of the 2024/25 income year.
In anticipation of this, Inland Revenue has released high-level on how it may view certain transactions and restructures, which may be impacted by the new trustee tax rate. Specifically, whether these are likely to be of concern from a tax avoidance perspective.
The transactions considered in Inland Revenue鈥檚 guidance are summarised as follows:
Transaction |
Tax avoidance concern? |
Features that may create such a concern |
Changing dividend payment dates (trust owns a company) |
No, in absence of other features (that suggest artificiality or contrivance) |
Lack of financial capacity (e.g., insufficient reserves or assets on liquidation) to pay the dividend |
Trust distributing income to lower rate beneficiaries |
No, if made in accordance with trust deed and trust law |
Beneficiary is not legally entitled to the distribution and/or cannot access the amount distributed/credited to them (e.g., if left as a loan owing to them) |
Changing the investment structure from a trust to a company (and transferring the assets) |
No, in absence of other features |
Interposition of a holding company between an operating company and a trust, or diverting personal services income through a company |
Winding up an existing trust |
No, in absence of other features |
|
Investing in a PIE |
No, in absence of other features |
|
Allocating beneficiary income which is resettled back on the trust |
Yes |
Beneficiary is not in reality benefiting from the distribution |
Crediting a beneficiary鈥檚 current account without their knowledge |
Yes |
Beneficiary has no expectation of receiving the income |
Replacing dividend income with loans |
Yes, if done in an artificial manner |
Will depend on commercial reality, including term of the loan, interest and repayment terms, and ability for borrower to repay |
Bringing forward income or deferring deductible expenses |
Yes, if done in an artificial manner |
If different to existing contractual terms or usual practice for payments or payment dates |
Creating or increasing income and/or expenditure (e.g., interest, dividends or management fee expenses) |
Yes, if it does not reflect the reality of the arrangement |
If involving related party transactions |
Our take
We welcome the release of Inland Revenue鈥檚 general guidance on the proposed 39% trustee tax rate. Inland Revenue鈥檚 view on what it considers to be within and outside the boundaries of tax avoidance is a helpful marker.
Observations
Necessarily, Inland Revenue鈥檚 guidance is based on the draft legislation as originally introduced into Parliament. That Bill is proceeding through a Select Committee process, where public submissions were sought. Those submissions, including by 乐鱼（Leyu）体育官网, raised various concerns, including the potential for over-taxation and the limitations of the limited carve-outs. In particular, it is worth noting that Inland Revenue鈥檚 guidance raises potential tax avoidance concerns with a key option that the original commentary accompanying the 39% trustee rate change suggested to mitigate over-taxation 鈥� resettling lower rate beneficiary distributions back on the trust. If there are changes to the draft legislation, in response to these concerns, then the guidance may need updating. However, this will not be known until March, when the Select Committee鈥檚 report back is due. Therefore, those looking to make decisions now around their trust arrangements, in anticipation of a 1 April start date, need to keep in mind that the final legislation could end up being different. This could also impact Inland Revenue's guidance.
Even if there are no substantive changes to the current draft legislation, as with any guidance, whether a transaction or restructure is likely to be acceptable, or not, will ultimately depend on the specific facts and circumstances. These are not questions with 鈥渂lack鈥� and 鈥渨hite鈥� answers. For example, while Inland Revenue鈥檚 view is that changing investment structures from a trust to a company, in and of itself, should not create tax avoidance concerns, how this is given effect may raise questions. If the transfer of assets is in consideration for a loan by the new company (compared to, say, the issue of equity) we can certainly see Inland Revenue asking some questions. The details (including the 鈥渉ow鈥� and 鈥渨hy鈥�) can matter and should not be overlooked.
In summary, Inland Revenue鈥檚 high-level guidance is a useful addition, but needs to be viewed in the context of the above. If there is any doubt, we recommend talking to your tax advisors, including on options to get greater certainty.
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