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HMRC internal manual

Trusts, Settlements and Estates Manual

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HM Revenue & Customs
Updated
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Trust income and gains: vulnerable beneficiaries: claims to special tax treatment: computing the amount of relief: income tax - example where the beneficiary has personal income

The details are the same as in TSEM3474 except that the beneficiary also has the following personal income and gains

  • Net bank interest of £2,500 (tax of £625 has been deducted at source)
  • Dividends of £2,700 (which carry a non-payable tax credit of £300)
  • A discretionary distribution from the trustees of £4,200 and
  • Personal chargeable gains (after taper relief, personal losses and the annual exempt amount) of £3,000.

The distribution from the trustees is not taken into account in computing the income tax liability of the vulnerable person for the purposes of calculating TLV1 and TLV2. TLV2 is therefore:

  Non-savings Savings Dividend Capital gains  
           
Income £0 £3,125 £3,000    
Capital gains       3,000  
Less personal allowance (£4,745)   £3,125 £1,620    
    £0 £1,380    
First £2,020 chargeable at starting rate (10%)     £1,380 £640  
Tax chargeable     £138.00 £64.00 £202.00
Chargeable at lower rate (20%)       £2,360  
Tax chargeable       £472.00 472.00
TLV2         £674.00

TLV1 is:

  Non-savings Savings Dividend Capital gains  
           
Income - actual £0 £3,125 £3,000    
Income treated as arising to the beneficiary £6,000 £5,000 £9,000    
  £6,000 £8,125 £12,000    
Chargeable gains       £3,000  
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%)     £12,000    
Tax chargeable     £1,200.00   £1,200.00
Chargeable at lower rate (20%)   £7,360   £3,000  
Tax chargeable   £1,472.00   £600.00 £2,072.00
TLV1         £3,474.00
Less TLV2         £674.00
VQTI         £2,800.00

The trustees’ liability is the same as shown in example 1 above and the deduction that they can claim is TQTI - VQTI (£7,325 - £2,800) = £4,525. Their liability is therefore £7,325 - £4,525 = £2,800.

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). The payment of £4,200 is treated as though a deduction has been made at the trust rate. The gross payment is:

£4,200 x 100/60 = £7,000

and applying the trust rate at 40% gives a deemed deduction of £2,800.

The tax which can be used to cover this deduction (the ’tax pool’) is income tax chargeable at the trust rate and dividend trust rate (minus the 10% non-payable tax credit). This amount is:

£2,800 - £900 = £1,900.

Assuming there is no tax pool brought forward from the earlier year, the trustees will have to pay a further £900 under ITA/S493 to cover the deemed deduction.