Tax rates

The tax rates for trusts remain unchanged. Trusts with an interest in possession pay income tax at the basic rate on general income, savings rate on interest and lower rate on dividends; discretionary trusts pay at 40% on general and interest income, and at 32.5% on dividends.

Changes to the system

Important changes to the taxation of trusts were announced for consultation last year, and some of these have now been implemented. Trustees for 'vulnerable' beneficiaries (disabled people and orphans under the age of 18) can elect to pay tax at the lower rates for 2004/05, even though the trust is discretionary. All discretionary trusts will only pay the lower rates on the first £500 of income for 2005/06.

Further reform of the system for trusts has been put off until 2006/07 while the full effects are discussed with interested professional bodies.