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HMRC internal manual

Trusts, Settlements and Estates Manual

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HM Revenue & Customs
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Trust management expenses: accumulation/discretionary trusts: relief against the special trust rates: deemed income

There are certain situations where items that are capital in trust law are deemed to be income for tax purposes, and are also taxable at the special trust rates.

Up to 5 April 2006

For periods to 5 April 2006 if the item was liable to tax at the special trust rates by virtue of being ‘treated as income to which S686 applies’, for example as in ICTA88/S686A (3) (company purchase of own shares) then the trustees were also entitled to relief for allowable TMEs under ICTA88/S686 (2AA) against that deemed income.

If the deemed income was liable to tax at the ‘rate applicable to trusts’, for example ICTA88/S720(5), then there was no basis for relief under ICTA88/S686(2AA), as there was no connection with ICTA88/S686 itself.

6 April 2006 to 5 April 2007

The situation changed at 6 April 2006. ICTA88/S686A was amended from that date to provide a common mechanism for treating the items 1 to 10 in the list in TSEM3201 as income and for applying the special trust rates. These ten items were treated as income to which ICTA88/S686 applies and so trustees were entitled to relief for allowable TMEs. Accrued income was not included in the list of ten items in ICTA88/S686A. Liability to the rate applicable to trusts was imposed by ICTA88/S720 (5) and so there was no basis for relief for TMEs against accrued income.

From 6 April 2007

From 6 April 2007 ITA/S484 provides for all the deemed income items in ITA/482, now including accrued income, to be given relief for allowable TMEs.