Dividend rules and IIPs

An IIP, that receives dividend income only from private company shares. This is then distributed to 25 beneficiaries of varying ages and circumstances. Each beneficiary receives between £6,000 - £20,000 from the Trust each year.

There is no allowance of £5,000 for the Trustees and the new dividend rules will force a 7.5% tax liability on IIPs unless the income is mandated. If the income is mandated, each beneficiary will be allowed the new the £5,000 tax free allowance.

Therefore, Trustees of a non-mandated IIP will have to put aside an extra 7.5% for the tax, but does the beneficiary then lose out on the dividend allowance altogether? Or can the beneficiary submit a tax return to be able to use their own dividend allowance against the monies received from the Trust?

It may be just me, but I cant find anything to clarify this and it seems unfair that a simple mandate (which will be a LOT of hassle in this case) will give each individual an allowance that they would otherwise miss out on.

There is obviously a lot of tax at stake!

Jonathan Lee
Jonathan Lee Consultancy

As noted on the Gross Interest on Designated A/C thread, there is a very interesting and pertinent article in this week’s Taxation magazine entitled “same but different” by Mark Wallace that you may find of interest:

Carlton Collister
landtax llp

Where tax has been accounted for by the trustees in respect of dividend income a beneficiary may reclaim that tax to the extent that it is not due, depending on their individual circumstances by means of a self assessment tax return SA100 or repayment claim R40.
Whilst it is noted that setting up individual mandates will involve a lot of hassle; this should be a one-off exercise and in the longer term much less hassle than having to compile and submit 26 (including the trust return) returns to HMRC each year.

Maxine Higgins
Citroen Wells

I’ve read the article and I don’t feel that it is entirely clear on the point that is being raised.

My understanding is that where a beneficiary has an entitlement to income under a trust (and that trust is not settlor-interested), that income does not change its character (as far as the beneficiary’s receipt of said income for tax purposes is concerned) irrespective of whether it is mandated to the beneficiary or distributed with an R185 and the beneficiary will be able to offset their dividend allowance in either scenario. The same applies to interest and the Personal Savings Allowance.

Perhaps an equally important issue, that I don’t think has been discussed by the forum, is that the above does not apply to beneficiaries receiving income from non-settlor-interested discretionary trusts in that discretionary distributions from such, irrespective of the nature of the income being distributed, will not qualify for either the dividend allowance or Personal Savings Allowance as far as the recipient beneficiary is concerned. This should, to my mind, be prompting a review of all discretionary trusts to see whether the granting of IIPs to beneficiaries might be prudent.

Paul Storrie
Storrie & Company

In answer to the query raised: yes the beneficiaries are entitled to the zero rate bands on their IIP trust income and consequently can make repayment claims.
The point raised about discretionary income distributions was raised in this forum previously when the new rules were initially proposed; however, such trusts are usually discretionary for a reason and we should never let the tax tail wag the commercial dog.
Perhaps in cases where the original objective no longer holds then conversion to an IIP could perhaps be considered but this will depend on individual circumstances rather than blanket advice.
Maxine Higgins
Citroen Wells

I am happy with the taxation of the scenario above. However, now that the 2016/17 Trust & Estate Tax Return has been released, I have a further question regarding the reporting in these circumstances.

My worry here is that the changes for 2016/17 will throw all IIPs that only receive UK dividend income into Self Assessment. These Trusts could previously tick the box saying all UK income has been taxed at source and request future Tax Returns are not issued.

I seem to recall STEP raising this with HMRC, proposing a look through allowing it to be sufficient for the beneficiaries to directly report the income and not the Trust. However, I cannot find any further correspondence in this respect.

Is anyone aware of any developments or answers?

Samantha Smith