TSEM4513 - 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 2023-2024 the income of the trustees (and tax paid on that income) is as follows:
Fund A
| Income type | Amount | Tax due from trustees | Total |
|---|---|---|---|
Rental Income |
£10,000 |
£1,000 @ 20% |
£200 |
- |
- |
£9,000 @45% |
£4,050 |
Dividend Income |
£ 5,000 |
£5,000 @ 39.35% |
£1,967.50 |
Tax paid |
- |
- |
£6,217.50 |
The settlor is given credit for the tax paid on the income attributable to the settlor - £6,217.50. Where the tax paid by the trustees exceeds the settlor’s own income tax liability the tax may be repaid to the settlor.
Fund B
| Income | Amount | Tax due | Total |
|---|---|---|---|
Dividend Income |
£15,000 |
£15,000 @ 39.35% |
£5,902.50 |
Tax paid |
- |
- |
£5,902.50 |
As the settlor is excluded from benefiting from Fund B, this tax is not available to the settlor. The normal rules apply and £5,902.50 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 that part is available to cover the settlor’s liability and the other part dealt with in the normal way.
Example
In 2023-2024 the income of the trustees (and tax paid on that income) is as follows:
| Income | Amount | Tax due from trustees | Total |
|---|---|---|---|
Savings Income |
£10,000 |
1,000 @ 20% |
£200 |
- |
- |
9,000 @ 45% |
£4,050 |
Tax paid |
- |
- |
£4,250 |
The settlor of the trust dies on 5 January 2024. 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 £3,187.50 (75% of £4,250).
The balance of the tax, £1062.50 goes into the tax pool.