Shock trust tax imposed by Finance Bill

Millions of individuals and companies that use trusts could be hit by an unexpected clause in the Finance Bill published yesterday which makes dividends from shares held by trusts vulnerable to income tax.

The Bill principally affects discretionary trusts, which are set up to allocate assets or income to specific beneficiaries. These trusts are used by individuals to distribute assets to their families, for instance, and by companies with share schemes.

Richard Law, corporate tax partner at Ernst & Young, said the Inland Revenue's original statements published with the October Budget had indicated trusts would be far safer from income tax.

Mr Richards said: "A change to the income tax treatment of trusts, arising from the change to the share purchase rules, has been hidden away in a schedule in defiance of public statements to the contrary. This is retrospective taxation and it is unacceptable."

Under Schedule 7, paragraph 3, of the Bill, the Government has introduced a tax charge on "qualifying distributions made to trustees after 8 October 1996" (as part of the change to the taxation of buy-backs and company purchases of their own shares).

The Bill includes the statement that "this paragraph shall be deemed to have had effect for the year 1996/7".

Mr Richards said that the Inland Revenue gave no hint of this. In fact the Revenue stated: "The income tax liability of taxpayers who receive such distributions will be unaffected by the change." Yet the Finance Bill would impose an extra 14 per cent income tax charge on these trusts, said Mr Richards.

More generally, Mr Richards noted: "Some of the drafting - for instance the finance lessor clauses - is pretty horrendous. Whatever happened to simplification?"

This point was echoed by Rosalind Rowe, director of Coopers & Lybrand's Property Finance Group.

"I'm disappointed that its an extremely complex Bill for what it is trying to achieve. The changes to capital allowances on fixtures is really over the top."