Trust income and gains: vulnerable beneficiaries - overview of the special tax treatment
Trustees may make a claim for special tax treatment for a tax year if the following conditions are satisfied:
- there is a beneficiary who falls within the definition of a vulnerable person (TSEM3420)
- the trustees hold property on ‘qualifying trusts’ (TSEM3430) for that beneficiary and
- a vulnerable person election (TSEM3450) has effect for all or part of that tax year.
Subject to TSEM3440, where there is more than one beneficiary, the property for the vulnerable person must be held in a specific fund or other part of the settled property for the benefit of that person. The income arising from property held on qualifying trusts is known as ‘qualifying trusts income’.
A vulnerable person election is made jointly by the trustees and the vulnerable person. A claim is made by the trustees alone for any year, from 2004-05, for which the election has effect. They do not have to make a claim for every year for which they are entitled to do so.
For income tax, where a valid claim has been made, the trustees are entitled to a deduction in terms of tax against the amount they would otherwise pay so that the final amount payable by them is based on the particular circumstances of the vulnerable person. The trustees therefore calculate what their tax liability on the qualifying trusts income would be in the absence of a claim for special treatment, and then what the vulnerable person’s tax liability would be on the qualifying trusts income if that income were to have arisen directly to him or her, taking into account his or her other income, capital gains and certain allowances. The trustees then claim the difference between these two figures as a deduction from their own income tax liability. The tax on income and deemed income determined in accordance with the vulnerable beneficiaries rules enters the tax pool (see TSEM3020).
See CG35515, External customers can see the guidance at www.hmrc.gov.uk/manuals/cgmanual/CG35515.htm, for the effects of making a claim in respect of CGT. In brief the trustees and beneficiary are treated as if the chargeable gains had arisen to the latter, and self assess accordingly. The beneficiary can then reclaim the tax back from the trustees.