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HMRC internal manual

Trusts, Settlements and Estates Manual

HM Revenue & Customs
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Trust income and gains: the charge on trustees: the tax pool - trustees calculate maximum discretionary payment

In this example, in the tax year 2010-2011 a trustee of a discretionary trust receives a net dividend of £1,350 (tax credit £150). The trustee is chargeable at 42.5%, which is partly covered by the 10% non-payable tax credit.

Description Amount Amount Amount
Dividend received £1,350    
Plus non-payable tax credit £ 150    
Gross income £1,500    
Tax at 10% on first £1,000 (standard rate band)   £100  
Tax at 42.5% on the remainder (£500 x 42.5%   £212.50  
Total tax   £312.50  
Less non-payable tax credit   (£150)  
Tax payable by trustee - goes into tax pool   £162.50  
Net income after tax     £1187.50

The trustee now has net income of £1,187.50 (net dividend of £1,350 less tax paid of £162.50). Only £162.50 of the total tax goes into the tax pool because the £150 dividend tax credit is not payable.

If the trustee pays the net income of £1,187.50 to the beneficiary, the tax credit of 50% on that net payment is £1,187.50 (gross amount of £2,375 at 50%). But if the tax pool has nothing brought forward from the previous year and there is no other income on which tax has been paid, the tax pool of £162.50 will not cover the tax credit of £1,187.50 on the payment made. Under S496 the trustee would have to pay £1,187.50 less £162.50 = £1,025, but there are no funds available.

Instead, the trustees can calculate the maximum amount of discretionary payment as follows:

Description Amount Amount
Net income after tax £1,187.50  
Add tax in tax pool £162.50  
Total amount to cover payment to beneficiary and tax credit at 50% £1,350.00  
Tax credit at 50% £675.00 £675.00
Less tax paid in tax pool   £162.50
Additional tax to be paid by trustee   £512.50
Net payment to beneficiary £675.00  

The beneficiary is paid net income of £675 with a tax credit of £675, which is equivalent to gross income of £1,350 with tax credit at 50%. The trustee pays a total of £675 tax to HMRC, £162.50 tax on the dividend received and the additional £512.50 under S496. So if the trustee is relying on the dividend income to fund both the payment to the beneficiary and the additional tax there are sufficient funds to release only 50% of the actual dividend, that is £1,350 x 50% = £675.