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HMRC internal manual

Trusts, Settlements and Estates Manual

HM Revenue & Customs
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Trust management expenses: IIP trusts: IIP trustees: deemed income

Unlike the trustees of accumulation/discretionary trusts, the trustees of IIP trusts are not normally chargeable to the special trust rates. Consequently there is generally no equivalent question of allowing TMEs against the special trust rates - but see ‘Practical considerations’ below.

For IIP trusts, there are certain items that are capital in trust law but deemed to be income for tax purposes, and are also taxable at the special trust rates. (See TSEM3201.)

UP to 5 April 2006

For periods up 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 purchases 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 TSEM3200 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 trust 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

Practical considerations

In practice, if an IIP trust incurs allowable TMEs, they will reduce the beneficiary’s entitlement to trust income and will not normally be taken into account for the trustees’ deemed income purposes. A capital receipt would normally not find its way into the hands of an IIP beneficiary, as it would not be trust income. (But see exceptions in TSEM3786 to TSEM3787.) So, the fact that the trustees were liable to the special trust rates on certain receipts would have no direct effect on the income beneficiary, and ITA/S484 TMEs would not come into question. But if there is a high enough level of allowable income expenses such that they reduce the IIP beneficiary’s entitlement to nil, and at the same time there is deemed income taxable on the trustees at the special trust rates, excess income expenses could be used against the trust rate income.