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HMRC internal manual

Inheritance Tax Manual

Refund to trustees of Income Tax repayments received by settlor

Where the settlor may still benefit from a trust they have created – a ‘settlor-interested trust’ – the trust income is treated as the settlor’s and is liable to Income Tax at their personal rate of tax. But, it is collected from the trustees at the trust rate of 50%. So, unless the settlor also pays tax on their own income at 50%, the tax paid by the trustees on the trust income will be more than the amount of tax due from the settlor. So the settlor can make a claim for a repayment of the difference.

The Income Tax (Trading and Other Income Act) 2005 (ITTOIA’05)/S646 has been amended so that with effect from 6 April 2010, the settlor is obliged to pass on any repayment of tax they receive in respect of trust income to the trustees.

As the settlor is under a legal obligation to pass on the repayment to the trustees, the value of the asset – the tax repayment – is offset by the obligation to the trustees. There is no loss to the settlor’s estate and therefore no transfer of value when the payment to the trustees is made.

There is more background information at TSEM4550 onwards.