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HMRC internal manual

Trusts, Settlements and Estates Manual

Trust income and gains: beneficiaries: beneficiary entitled to trust income - credit for trustees' tax

If the trustees have paid tax or have received income with tax taken off, the beneficiary is given credit for that tax.

For example, in 2009-10 the trustees have gross rental income of £2,000 on which they pay tax £400. They pay £1,600 to the beneficiary. The beneficiary is entitled to the gross amount £2,000, and is taxable on that amount. He or she is given credit for the £400 tax paid by the trustees.

If the beneficiary is a higher rate taxpayer, he or she will have further tax to pay see example in TSEM3766. If the beneficiary is a non-taxpayer, he or she may claim a repayment.

The beneficiary is given credit for trustees’ tax only if the beneficiary is taxable on the same item. If the interest in possession (IIP) trustees receive an amount that is capital in trust law and deemed to be income for tax purposes (see TSEM3201 and TSEM3768), the beneficiary is not given credit for the trustees’ tax. The IIP beneficiary would not be entitled to such a receipt, as it would not be trust income, and would not be taxable on the receipt.

Settlements legislation

Different rules apply where the income of the IIP beneficiary is treated as that of the settlor under the settlements legislation. Examples of this area where the IIP beneficiary is a spouse, civil partner or minor child of the settlor. See TSEM4512.