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HMRC internal manual

Trusts, Settlements and Estates Manual

HM Revenue & Customs
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Trust income and gains: vulnerable beneficiaries: claims to special tax treatment: computing the amount of relief: income tax - basic example

A trust has arisen in England as a result of an intestacy. There is one current beneficiary, a UK resident minor who is a vulnerable person. Because of the right to accumulate the trustees are liable at the special trust rates. A valid vulnerable beneficiary election is in force. The trustees receive the following income in 2004-05:

Rent £6,000
Net bank interest £4,000 (tax of £1,000 has been deducted at source)
UK dividends £8,100 (these carry a non-payable tax credit of £900).

Their income for tax purposes is:

Rent £6,000
Interest £5,000 (net interest of £4,000 + tax deducted £1,000)
Dividends £9,000 (dividends received of £8,100 + tax credit £900).

TQTI (the trustees’ tax liability before making a claim for special tax treatment) is:

  Non-savings Savings Dividend  
Income £6,000 £5,000 £9,000  
Tax rate 40% 40% 32.5%  
Tax chargeable £2,400.00 £2,000.00 £2,925.00 £7,325.00

The vulnerable person has no personal income or gains in the year and so the amount of TLV2 is nil.

TLV1 (the amount of additional tax that the vulnerable person would pay if the qualifying trusts income arose directly to him or her) is:

  Non-savings Savings Dividend  
Income - actual £0 £0 £0  
Income treated as arising to the vulnerable person £6,000 £5,000 £9,000  
  £6,000 £5,000 £9,000  
Less personal allowance £4,745      
First £2,020 taxable at the starting rate (10%) £1,255 £765    
Tax chargeable £125.50 £76.50   £202.00
Chargeable at dividend rate (10%)     £9,000  
Tax chargeable     £900.00 £900.00
Chargeable at lower rate (20%)   £4,235    
Tax chargeable   £847.00   £847.00
TLV1       £1,949.00
Less TLV2       £0.00
VQTI       £1,949.00

The reduction that the trustees can claim is TQTI - VQTI (£7,325 - £1,949) = £5,376. Their final liability is therefore:

Tax due £7,325.00
Less reduction for special tax treatment £5,376.00

The trustees must also ensure that they have paid enough income tax to cover the deemed deduction of tax on the distribution to the beneficiary (see TSEM3490