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HMRC internal manual

Trusts, Settlements and Estates Manual

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HM Revenue & Customs
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Trusts for particular purposes: Direct Payment trusts - specific income tax aspects

Payments into the Direct Payments (DP) trust from council

For both bare and discretionary DP trusts, the payments from the local council into the trust form the trust capital. As such, they would not be taxable.

Income arising to the trust

The Department of Health’s line is that a person should not be holding enough direct payment money in a bank account for long enough to accrue any interest. In the unlikely event that it arises, the interest will be taxed according to the type of trust.

In a bare DP trust, any interest is taxable on the beneficiary at his or her marginal rates.

In a discretionary DP trust, any interest is taxable on the trustees at the trust rate.

Payments out of the trust to beneficiary

For bare DP trusts, payments out of the trust have no tax consequences.

For discretionary DP trusts, payments from capital to the beneficiary are not taxable, unless they are a substitute for earned income, which is extremely unlikely to be the case.

As mentioned above, there is unlikely to be any income. If exceptionally there is and payments are made from income, they are taxable on the beneficiary, with a credit for tax paid by the trustees at the trust rate. The trustees would have to provide form R185 (Trust Income) on making any payments from income.

Trustees’ expenses

The question of trustees’ expenses will arise only if there is trust income, which is unlikely.

Guidance on bare trusts and trustees’ expenses is at TSEM8405.

Guidance on discretionary trusts and trustees’ expenses is at TSEM8200

Other expenses

The question of other expenses will arise only if there is trust income, which is unlikely.

DP trusts may incur ‘volunteer’ expenses and/or ‘buddy’ expenses. These are likely to be expenses such as travel costs incurred in relation to volunteers who are not trustees. For both bare and discretionary DP trusts such costs would not be deductible against income for tax purposes.