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HMRC internal manual

Trusts, Settlements and Estates Manual

Trust income and gains: vulnerable beneficiaries - discretionary payments to a beneficiary

Discretionary payments to a beneficiary and the operation of ITA/S493 are not affected by a claim to special tax treatment. However, a claim will reduce the trustees’ liability to income tax and that can affect the amount of tax that goes into the tax pool.

Income distributed to a beneficiary by UK resident trustees of a discretionary trust is treated as an amount from which tax payable at the special trust rate has been deducted at 45% from 2016-17 (ITA/S493). This amount is treated as a repayable credit in the hands of the beneficiary. A discretionary payment, whether or not a claim to special tax treatment is made, will still carry a 45% credit as appropriate and the trustees have to ensure that the tax pool covers this. If not they will face a charge on the shortfall under ITA/S496.

Where the amount of tax paid by the trustees, which would normally enter the tax pool under ITA/S498, is reduced because of a claim to special treatment, the tax that then remains payable will enter the tax pool.