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HMRC internal manual

Trusts, Settlements and Estates Manual

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HM Revenue & Customs
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Settlements legislation: tax paid by trustees where trust is not wholly settlor interested

Trust is partially settlor interested

The income tax paid by trustees for a tax year may be paid partly on income attributable to a settlor and partly on income from property from which a settlor is excluded from benefit. The tax paid on income attributable to the settlor does not enter the tax pool - see TSEM4512. Tax paid on other income enters the tax pool in the normal way - see TSEM3756 onwards,

Example

A settles property into the A discretionary settlement. The settlement consists of two funds.

Fund A contains a house which is let and a block of shares in A plc.

Fund B contains a block of shares in B plc.

Under the terms of the settlement the settlor and any spouse or civil partner of the settlor are excluded from benefiting from Fund B.

In 2009-2010 the income of the trustees (and tax paid on that income) is as follows:

Fund A

    Tax due from trustees  
       
Rental Income £10,000 £1,000 @ 20% £200
    £9,000 @40% £3,600
Dividend Income £ 5,000 £5,000 @ 32.5% (of which 10% satisfied by tax credit) £1,625
Tax paid     £5,425

The settlor is given credit for the tax paid on the income attributable to the settlor - £5,425. Where the tax paid by the trustees exceeds the settlor’s own income tax liability the tax (excluding the £500 non payable tax credit attached to the dividends) may be repaid to the settlor.

Fund B

Dividend Income £15,000 £15,000 @ 32.5% (of which 10% satisfied by tax credit) £4,875
       
Tax paid     £4,875

As the settlor is excluded from benefiting from Fund B, this tax is not available to the settlor. The normal rules apply and £3,375 of the tax paid (£4,875 less £1,500 non-payable tax credit attached to the dividends) enters the tax pool.

Trust ceases to be, or becomes, settlor interested

A trust may cease to be settlor interested part way through a tax year, for example when the settlor dies. Similarly, a trust may become settlor interested part way through a tax year, for example the settlor may marry or enter into a civil partnership with an existing beneficiary of the trust.

Where this happens the tax paid by the trustees should be apportioned on a time basis so the part is available to cover the settlor’s liability and the other part dealt with in the normal way.

Example

In 2009-2010 the income of the trustees (and tax paid on that income) is as follows:

    Tax due from trustees  
       
Savings Income £10,000 1,000 @ 20% £200
    9,000 @ 40% £3,600
Tax paid     £3,800

The settlor of the trust dies on 5 January 2010. The trust ceases to be settlor interested on that date because ITTOIA/S624 applies only to income arising under a settlement during the life on the settlor.

The settlor is taxed on £7,500 and is given credit for £2,850 (75% of £3,800).

The balance of the tax, £950 goes into the tax pool.