The announcement that a dividend nil rate band was to be introduced with effect from 6 April 2016 was understandably welcomed by most taxpayers. From 2016/17 individuals can receive up to £5,000 of dividend income (in excess of the personal allowance) tax free.  Rather disappointingly, neither trustees nor executors are entitled to the dividend nil rate band. The dividend position for trustees and executors from 6 April 2016 is set out below.

Interest in Possession (IIP) Trusts

With the abolition of the dividend tax credit trustees will face an income tax liability of 7.5% on receipt of any dividends and will have to provide income details to the beneficiary to declare in their own tax return. Depending on the availability of the beneficiary’s personal allowance and dividend nil rate band, the tax paid on the trust dividend income could be repaid to the beneficiary. Where income is instead mandated directly to a beneficiary who has an IIP, the trustees are effectively ‘eliminated’ from the process and are not required to report the income nor pay any income tax liability arising on the mandated income. The beneficiary reports the income and pays the corresponding tax liability, if applicable.          

Discretionary Trusts

The tax rate for dividend income received by a discretionary trust from 6 April 2016 is 38.1%. Discretionary trusts continue to have a standard rate band of between £200 and £1,000 and any dividend income which falls into this band will be taxed at the basic rate of 7.5%.  Another significant change for discretionary trusts is the calculation of the tax pool. Although it initially appeared that only the difference between the trust rate and the basic rate, ie. 38.1% - 7.5% = 30.6% would enter the tax pool, this was rectified once Finance Act 2016 was enacted so that the full 38.1% can be used against future discretionary distributions of income.


The position of executors is very similar to that of IIP trustees. Prior to 2016/17, the dividend tax credit covered the executors’ liability to income tax which meant dealing with the tax position for the period of administration was relatively straightforward. It is now the case that even the smallest of estates may have to register with HMRC and complete tax returns for the period of administration which means, unless the executors deal with HMRC directly, additional professional fees will be incurred.  However, provided the estate is not regarded as a complex estate (ie. the value of the estate is less than £2.5m, disposal proceeds are less than £250,000 in any one tax year and the period of administration does not continue into a third tax year) and the tax liability is less than £10,000, HMRC are generally willing to deal with any tax liability on an informal basis. This will still incur some additional cost to the estate not to mention the inevitable delay in agreeing any such liability with HMRC.

Although HMRC Trust and Estates have confirmed that no notification is required when the only source of income from an estate is savings income and the tax liability is less than £100, there does not appear to be such a concession for dividend income.

Further complications arise for estates for which the period of administration spans tax years both prior and subsequent to the introduction of the new dividend rules.

It is unfortunate that by failing to allow trustees and executors a dividend nil rate band of any size, that many more trusts and estates will fall into Self Assessment, resulting in additional compliance costs. We will only have an idea as to how many additional trusts and estates have actually been affected by these changes after 31 January 2018, the deadline for submitting the 2016/17 tax return.