TSEM4512 - Settlements legislation: tax paid by trustees where income is treated as that of the settlor

ITTOIA/S624(1)

ITTOIA/S646(8)

Income arising under a settlement where the settlor retains an interest is treated as that of the settlor and the settlor alone. ITTOIA/S646(8) provides that where the income arises to trustees they are liable to tax on the income as recipients. Tax paid by the trustees in these circumstances is treated as paid on behalf of the settlor and is available to be used against the settlor’s own tax liability.

Bare trusts

Trustees of bare trusts are not generally required to make returns or pay income tax. Income arising under a bare trust is taxed directly on the settlor.

IIP trusts

The tax paid by trustees of an IIP trust on any income treated as that of the settlor is treated as paid on behalf of the settlor. Where the income does not belong to the settlor (for example, it belongs to a spouse or civil partner as life tenant) the income is not taxable on the life tenant and the tax paid by the trustees is not available to that life tenant.

Accumulation/discretionary trusts

The tax paid by the trustees of an accumulation/discretionary trust on income attributable to the settlor under ITTOIA/S624 is treated as paid on behalf of the settlor. As such it does not enter the tax pool. Discretionary payments made to other beneficiaries out of such trust income are a new source of income and come with a notional tax credit (ITTOIA/S685A(3)) - see TSEM3757.

Top of page

Trusts for minor child of settlor

ITTOIA/S629(1)

ITTOIA/S646(8)

Top of page

Bare trusts

Trustees of bare trusts are not generally required to make returns or pay income tax. Income arising under a bare trust is taxed directly on the settlor.

Top of page

IIP trusts

The tax paid by the trustees of an IIP trust on any income treated as that of the settlor is treated as paid on behalf of the settlor. The income is not taxable on the child as a life tenant and the tax paid by the trustees is not available to the child.

Top of page

Accumulation/discretionary trusts

Income arising to the trustees of an accumulation/discretionary trust to which ITTOIA/S629 applies is not in general treated as that of the settlor as it arises. Tax paid by the trustees enters the tax pool in the normal way. Income does not usually belong to the child until a discretionary payment is made. When such a payment is made ITTOIA/S629 treats the child’s income as that of the settlor and the settlor alone, subject to certain restrictions. The tax credit attached to the discretionary payment is available to the settlor and not the child - ITA/S494.