Higher top-up tax looming if Government doesn't change

Labour has already enacted changes to trusts that will affect the self-employed as well as residential property investors and mortgage advisers will need to be aware of them.

The tax rate is rising from 33% to 39% on trusts from 1 April to align with the top marginal tax rate and Gilligan says that will be a big step up in tax rates for people who derive their income from a trust.

Outlining what will happen at Bayleys’ recent Old vs New Property webinar, he says trusts, of course, can distribute income to beneficiaries using their marginal tax rates. “It is called income splitting. It's one of the benefits of a trust.”

However, one change that will pop up is what Gilligan calls a top-up tax, which is the difference between the company tax rate and the trust tax rate. “If a dividend is declared from a company to a trust, the company is taxed at 28%, the trust is taxed at 33%, and under existing rules a 5% top-up tax is paid. From next year it will become 11%.”