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HMRC internal manual

Trusts, Settlements and Estates Manual

Trust income and gains: the charge on trustees : standard rate band - income to which the band applies

From 2005-06 ICTA88/S686D provides that the first part of taxable income, which would otherwise be chargeable at the special trust rates, is instead chargeable at the basic rate, lower rate (up to 2007-08) or dividend ordinary rate, depending on the nature of the income. This first part of income is known as the standard rate band. From 2006-07 the standard rate band applies to any income or deemed income that is otherwise chargeable at the special trust rates. It therefore applies not only to income that can be accumulated or paid at discretion (ITA/S479) but also to certain capital receipts that are deemed to be income when received by both discretionary and non-discretionary trusts. See TSEM3018.

ICTA88/S686D was rewritten as ITA/S491. Section 686D and ITA/S491 do not apply to chargeable gains - they remain chargeable at the appropriate CGT rates.

Any income that is already chargeable at the basic rate, lower rate (up to 2007-08) or dividend ordinary rates is not included in the standard rate band. In the case of discretionary trusts within ITA/S479, income which has been applied to pay trust management expenses is not chargeable at the special trust rates. So any income that has been applied in this way is not included in the £1,000 band (£500 band in 2005-06).

More than one settlement

If a settlor of a trust or settlement has made more than one settlement the standard rate band is reduced in accordance with ITA/S492. This applies to the standard rate band of £1,000 in 2006-07 and later years only. The standard rate band of £500 in 2005-06 is not reduced.

Where ITA/S492 applies, the standard rate band is reduced by dividing the £1,000 by the total number of settlements made by the same settlor which are in existence in the year. The amount cannot be reduced below £200. So, if a settlor has made two settlements each settlement will be entitled to £500; if there are three settlements each will be entitled to £334; and if there are four each will be entitled to £250. If a settlor has made five or more settlements each will be entitled to £200.

Any settlement that is in existence during any part of the year will count towards the total number of the settlor’s settlements. If there is more than one settlor of a settlement, the amount is reduced by reference to the settlor with the highest number of settlements.

Charitable donations

Ordinary donations by the settlor to third party charities would not be counted as separate settlements when considering the amount of standard rate band due. 

But there is no exemption in ITA/S492 for charitable settlements made by the settlor.   Where an individual sets up a charitable trust, or has a distinct say in what happens to his or her donations, this is taken into account for S492 purposes :

Example 1.  A wealthy settlor establishes 5 private discretionary trusts for his family, and one charitable trust. All 6 would be counted for S492 purposes. 

Example 2.  A wealthy individual wants to make a charitable donation to her local community.  She does not want to run her own charitable trust because of all the administration associated with it, but she does want to have a say in how and where the money is distributed.  She makes a lump sum donation to her local Community Foundation who then ring-fence that money.  The donor approves the charities that the Community Foundation passes funds to.  There is no formal trust created by the donor, but there is a letter of wishes and ring-fencing of the donation.  The donation to the Community Foundation would be taken into account for S492 purposes. 

Additions to an existing settlment

S492 would not count an addition to an existing settlement made by the same person to be a separate settlement.  So if individual has some sort of account with a charitable foundation as in example 2, and makes an initial donation, that is a settlement for S492 purposes.  But if that individual adds money to the account, that would be merely an addition to an existing settlement, and not another charitable settlement for S492 purposes.