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HMRC internal manual

International Manual

DT applications and claims: Non-resident beneficiaries of UK trusts

Distributions to a beneficiary with a discretionary or a contingent interest

Definitions:

  • Discretionary Interest

Any distribution made to the beneficiary is at the discretion of the trustees. The beneficiary has no right to trust income or to trust capital.

  • Contingent Interest

A beneficiary has an interest in the trust dependent on something happening (the ‘contingency’). Usually this will be the beneficiary reaching a specified age. Trustees will often have discretionary powers until the contingency happens. For that period the trust is a discretionary trust.

Taxation of discretionary trusts

Income of UK resident discretionary trusts is taxed at the rate applicable to trusts on all income except dividends, which are taxed at the dividend trust rate. Credit is given for income tax and tax credit, and the trustees pay the additional amount.

  • From 6 April 2004 dividends (including foreign dividends) are taxed at the dividend trust rate of 32.5%; all other income is taxed at 40%.
  • From 6 April 1999 to 5 April 2004 dividends (including foreign dividends) were taxed at the dividend trust rate of 25%; all other income is taxed at 34%.
  • Before 6 April 1999 the rate applicable to trusts was 34% on all income. There was no separate rate for dividends.

The beneficiary’s distribution

A distribution to a beneficiary is treated as an amount that is net of tax at the rate applicable to trusts of 40%. The gross amount is regarded as an annual payment, and not identified with the underlying trust income (see TSEM3755). Where income underlying the distribution is from dividends, the difference between the dividend trust rate and the rate applicable to trusts is made up from the trust’s tax pool.