TSEM8510 - Trust management expenses: settlor-interested trusts: accumulation/discretionary trust
The settlor of a 'settlor-interested' accumulation/discretionary trust gets no relief for TMEs. ‘Income arising under a settlement’ in a settlor-interested trust is the gross income without the deduction for trust management expenses.
In computing the settlor’s liability, the same deductions and reliefs are allowed as would be if the deemed income had arisen directly to the settlor. But no trust management expenses are allowed over and above the normal deductions for each source of income.
The following example uses income tax rates current at the date of publication.
A settlor-interested accumulation/discretionary trust has non-dividend income of £10,000 and incurs allowable TMEs of £800.
Trustee`s tax: As the trust`s income exceeds the small income threshold, the trustees' income is chargeable wholly at the trust rates. The £800 of TMEs is treated as being funded out of £1,000 of gross income taxed at 20% (tax £200). The remaining £9,000 of income is taxed at the trust rate of 45% (tax £4,050). The trustees therefore pay total income tax of £4,250.
Settlor`s tax: The settlor is chargeable on the full £10,000 of income as part of their own income tax assessment with no deduction for TMEs. Assuming a settlor is chargeable at 40% on this income, the settlor is liable for tax of £4,000 and, after credit for the trustees' tax, is due a repayment of £250. A settlor chargeable at 45% on this income is liable for tax of £4,500 and, after credit for the trustees' tax, is due to pay an additional £250.