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HMRC internal manual

Trusts, Settlements and Estates Manual

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HM Revenue & Customs
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Non-resident trusts: beneficiary’s chargeability - trust income: Extra Statutory Concession B18 - example

Non-resident discretionary trust

Trust income for year 2013-14:

UK Property Income = £10,000. Income Tax paid = £2,000.

UK Bank Interest = £20,000. Income Tax deducted = £4,000

Foreign Bank Interest = £1,000. Income Tax = NIL

Allowable trust management expenses = £5,000

Discretionary income payment made to UK resident beneficiary during 2013-14 = £4,000

Amount of income on which the trustees are chargeable to income tax, and income tax chargeable:

Income Tax due:

Income chargeable at the standard rate band (TSEM10240)

UK Bank Interest = £1,000 @ 20% = £200.00

Income chargeable at the trust rate -

UK Bank Interest = £19,000

UK Property Income = £10,000

Total = £29,000

Less trust management expenses,*of £6,049 @ 20% = £1,209.80

Chargeable at trust rate, of £22,951 @ 45% = £10,327.95

Total tax chargeable = £11,737.75

Tax paid = £6,000.00

Tax due = £5,737.75

  • Trust management expenses are set against income to arrive at the amount chargeable to Income Tax at the special trust rates.

The expenses are to be reduced by the proportion of income arising to trustees which is untaxed foreign income (ITA/S487(2)):

UK Bank Interest = £20,000

UK Property Income = £10,000

Foreign Bank Interest = £1,000 (untaxed)

Total income = £31,000

Expenses relating to foreign bank interest:

(£1,000 × £5,000) × £31,000= £161

Expenses allowed in arriving at income chargeable to Income Tax at the special trust rates are £4,839 (£5,000 - £161).

Allowance due = £6,049 (£4,839 grossed up by reference to basic rate on savings income - ITA/S486(1) - Step 5). (See TSEM8245) Amount of available income for each source of income, out of which discretionary income payment treated as made:

Amount of available income for each source of income, out of which discretionary income payment treated as made:

UK Bank Interest = £20,000

less Trust Management Expenses: (£6,049 @ 20%) £1,209.80

= £13,951

Standard rate band: £1,000 @ 20% = £200.00

Special trust rate: £12,951 @ 45% = £5,827.95

Tax charge = £7,237.75

Net available bank interest = £20,000

Less trust management expenses * £4,839.

= £15,161

Less tax charge = £7,237.75

Net = £7,923.25

  • Although the expenses have been grossed up for purposes of computing tax due, it is the actual amount of expenses paid by trustees which is to be taken into account in arriving at the amount of income available, out of which a payment could be made to beneficiary.

UK Property Income = £10,000

Tax charge = £4,500 (£10,000 @ 45%)

Net available property income = £5,500

Foreign Bank Interest = £1,000

Less trust management expenses £161

Net available foreign income £839

The total net available income is £14,262.25 (£7,923.25 + £5500 + £839)

The discretionary income payment of £4,000 is treated as met out of the following income:

Net available

UK Bank Interest: (£7,923.25 x £4,000) ÷ £14,262.25 = £2,222

UK Property Income: (£5,500 x £4,000) ÷ £14,262.25 = £1,543

Foreign Bank Interest: (£839 x 4,000) ÷ £14,262.25 = £235

Total = £4,000

Relief due to beneficiary under ESC B18:

UK Bank Interest: (£2,222 x 7,237.75) ÷ £7,923.25= £2,030

UK Property Income: (£1,543 x £4,500) ÷ £5,500 = £1,262

Total tax credit = £3,292.