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WILLs & Powers of Attorney
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Oct. 12, 2016

Finance Act 2016: information relating to probate, inheritance and trusts

The Finance Bill 2016 received Royal Assent on 15 September 2016, thereby becoming an Act of Parliament (law). The Bill contains changes to probate law and inheritance tax and the new measures will apply from April 2017.

What changes have been made to Inheritance Tax?

– Additional nil-rate band

The value of estates not subject to Inheritance Tax will be increased to £100,000 and will increase a further £25,000 every year until 2020. This applies to residences being passed onto lineal descendants, i.e. children, grandchildren, adopted children, foster children and children of whom the deceased was a guardian.

– Pension drawdown funds

The Bill includes a measure to ensure that no Inheritance Tax charge arises where an individual has remaining pension funds in a drawdown account upon death. This measure will also be backdated to cover any deaths on or after 6 April 2011.

Trusts and estates

– Interest in dividends trusts and estates

Interest in possession (IIP) trusts and estates will be required to pay tax on dividends at the ordinary rate, which as stated in the Finance Bill 2016 will be set at 7.5%.

– Discretionary trust charges

The Finance Bill 2016 sets the dividend ordinary rate at 7.5% and at the same time abolishes the 10% dividend tax credit.

However, as from 6 April 2016 dividends are paid without a tax credit so the trustees now have a liability at 7.5% on dividends received within the standard rate band (equivalent of the dividend ordinary rate) and 38.1% on any excess. The dividend allowance available to individual taxpayers does not apply to trusts. So even though the trustees physically pay 7.5% tax, on the current wording the 7.5% does not go into the tax pool. It is only the difference between 38.1% and 7.5%, i.e. only 30.6% that enters the tax pool.


The Finance Bill 2016 has introduced measures which ensure an additional nil-rate band, meaning that no Inheritance Tax will be paid on estates valued at up to £100,000, and this figure shall rise by £25,000 each year until 2020. Furthermore, no Inheritance Tax charges will apply to individuals with remaining pension funds in a drawdown account.

Trustees of discretionary trusts are taxable at 20% (7.5% on dividends) within the £1,000 standard rate band and 45% (38.1% on dividends) on the balance. Trustees with interest in possession trusts will have a 20% liability on interest and 7.5% on dividends. In view of the fact that the income flows through to the Income Beneficiary then it will retain its nature, meaning that the interest in possession beneficiary is taxed on the interest or dividends as appropriate. It is important to remember for the income to be ‘mandated’ directly to the beneficiary, this would greatly simplify administration.