Discretionary trust tax pool

FB 2016 introduced a 7.5% ordinary dividend rate and abolished the 10% tax credit.

S498 ITA2007 states that the tax pool receives an amount of tax calculated as the difference between the ordinary tax and trust dividend tax rate. Based on this the 7.5% tax paid on dividends will not enter the tax pool, therefore only 30.6% will of the tax paid by the trustees will be available to frank distributions. HMRC’s guidance has been amended accordingly.

However a number of commentators recently stated that all the “real tax paid”, here 38.1% will enter the tax pool.

I am wondering whether I am misinterpreting the legislation or is this another bit of “odd” tax legislation for discretionary trusts?

Iris Wuenschmann-Lyall
Toby Harris Tax Consultants

Below a link to an article I wrote in March:

https://www.linkedin.com/pulse/trust-tax-pools-post-5-april-2016-david-hartles?trk=mp-author-card

There is a rumour that it was an error, but with the imposed purdah before the Brexit vote, nothing is happening to FB16 so we wait in anticipation of a correction.

David Hartles
Shipleys

On a similar theme, will income paid or mandated from a life interest trust, or distributed from a discretionary trust, qualify for the new dividend allowance in the hands of the beneficiary?

Simon Northcott

Life interest trust - yes it should, as the income keeps its form flowing through the trust. Mandating will become important, as it may avoid the cost of a repayment claim being made by a beneficiary for the tax paid by the trust (if less than the 0% dividend band), and indeed the trustees being required to submit a return where they did not in the past due to only dividends being received (also re untaxed interest from now on).

Discretionary - no, as the income loses it’s identity through the trust - the income received by the beneficiary is no longer defined by the underlying income type of the trust.

David Hartles
Shipleys

On these points, the following might be worth mentioning:

  1. In the past, trustees for a wholly IIP trust could skip completion of the majority of the SA900 return if they could state that all income was mandated to beneficiaries and this had had basic rate tax deducted at source. To my mind, if part of the income now comprises dividends, they can no longer make this declaration as the dividends no longer carry any tax credit.
  2. Trustees don’t enjoy either the £5k dividend allowance or the personal savings allowance of course, so, for a wholly IIP trust, there will also now be a tax liability to be paid on net dividends received by the trustees at 7.5%. If the trust mandates income to the beneficiary (and some of this comprises dividends), it looks to me that they will need to ensure that they have other means from which to pay the tax liability.

Paul Storrie
Storrie & Company

There is no requirement for the income to have been taxed at source in order to skip completion of the trust return - just that all income must have been mandated, or any which has not been mandated be taxed at source.

Therefore, if all income is mandated to the beneficiary (or just all the gross income), they are treated as receiving gross and the liability to tax passes to them, and the return can be skipped through (or in most cases a nice letter to HMRC will see them dispense with returns altogether).

David Hartles
Shipleys

Hmrc have agreed to income being returned by the life tenant and not the trustees, even if it included gross income. Indeed the question on the tax return whereby details of income are not required has an option only referring to the mandating of income, not necessarily net income.

If I rely on this, and having got written agreement from hmrc that tax returns will no longer be issued to the trustees,I am never sure if hmrc could come back and ask for the tax if the life tenant fails to declare it, so I obtain an indemnity from the life tenant.

Simon Northcott

Actually, the trust tax return allows you to skip most of it if you can say simply that all the trust income is mandated to the beneficiary (regardless of whether tax is deducted or not), or if you can say that part of the income is mandated, and the part that is not is taxed at source.

So the key will be to ensure that as far as possible income of an IIP trust is mandated to the life tenant, although I appreciate that that will not always be practical or possible.

Diana Smart
Gordons LLP

Re.dividends and the tax bill under the Finance Bill provisions, STEP wrote to HMRC about this in April this year. We have not received a substantive reply as yet.

Joanna Pegum
STEP

The amendments required in order to correct the tax credit/tax pool anomaly in FB16 have now been tabled here:

http://www.publications.parliament.uk/pa/bills/cbill/2016-2017/0001/amend/finance_rm_pbc_0627.1-7.html

David Hartles
Shipleys LLP

Sorry to be dense-but the original post was:
"FB 2016 introduced a 7.5% ordinary dividend rate and abolished the 10% tax credit. S498 ITA2007 states that the tax pool receives an amount of tax calculated as the difference between the ordinary tax and trust dividend tax rate. Based on this the 7.5% tax paid on dividends will not enter the tax pool, therefore only 30.6% will of the tax paid by the trustees will be available to frank distributions. HMRC’s guidance has been amended accordingly. However a number of commentators recently stated that all the “real tax paid”, here 38.1% will enter the tax pool. I am wondering whether I am misinterpreting the legislation or is this another bit of “odd” tax legislation for discretionary trusts? "
Does the amendment mean all 38.1% will now enter the tax pool?

Simon Northcott

Yes - the previous computation of the tax entering the pool, being the difference between the trust dividend rate and the ordinary dividend rate, has been removed, so the full tax paid by the trust will enter the pool being the 7.5% in the standard rate band and the 38.1% thereafter.
David Hartles
Shipleys LLP

Whilst I’m please that, following on to my earlier request to STEP to make
representations, it is now proposed that the 7.5% out of 38.1% non entry
lacuna will be rectified; HMRC do not appear to have taken on board the
fact that there is still no proposed rectification of my interpretation of
the current and proposed amended legislation i.e. non entry into the tax
pool of 7.5% dividend ordinary rate income tax charged on dividends falling
within the first slice.

I have therefore today requested STEP to, assuming they agree my
interpretation,go back to HMRC on this point.

Forum members might be interested to note that I also raised this point in
email representations to HMRC and the Shadow Chancellor of the Exchequer
(via my MP) but despite reminders have not had replies from them

Andrew M Mortimer

Following on to the message I posted on 30 June I’m pleased to now be be
able to advise forum members that STEP agreed my interpretation and having
gone back to HMRC have received the following response:

“Thank you again for highlighting this issue. I have had confirmation that
the government proposes to make an amendment to the Finance Bill at Report
Stage in order to deal with the issue”.

Andrew M Mortimer