I have an estate which holds shares in company A which pass to the trustees of a discretionary trust.
During the administration period, the company paid a dividend which was paid directly to the beneficiaries missing out the trust.
As the dividend was paid during the adminsitration period I get to the following: -
a) dividend taxed within the estate and a R185e prepared in the name of the trustees
b) the estae income is then taxed in the discretionary trust with a tax credit
c) an income distribution is then made to each of the beneficiaries together with a 45% tax credit
Is this correct? If so, where would this go on the trust tax return.
Or is i quite simply that the trust is created immediately on death, and any income relating to the trust’s share of the assets is taxed on the trustees, missing out the estate.
If the shares were still owned by the estate when the dividend was paid then strictly the estate is taxable on these, as the beneficial owner of the shares. Your first post would be correct.
You could declare the dividends directly on the trust tax return and make a white space note, but I have seen it in the past where HMRC have insisted the “strict” position is followed.
I would also consider the amounts involved, if the dividend is small and the only taxable income the short cut method does save some time and faff. But if there is an estate tax return to do for, say, rents and other income, I would go the “strict” route. Otherwise the tax return would be incorrect.
If the procedure you outline is Nick’s strict position then how is the estate income recorded on the trust’s return? The tax return guide does say regarding Q9 “Include…income from estates, where that income has been passed to the trustees of discretionary or accumulation trusts”. Which seems to fit the bill, but the problem is that nowadays there is no tax credit on dividends and I can’t see how credit is given for the 7.5% (or whatever) paid by the PRs. What are the mechanics of doing it ‘strictly’?
The payment is up grossed up at the dividend ordinary rate, the notional tax credited against the trustees’ tax liability, and entered in the pool, with the trap being that if distributed it will not fully frank the tax deductible from income payments to beneficiaries
The dividend tax credit was abolished by FA2016 Sch 1 para 1 and dividend income was then subject to income tax at the dividend ordinary rate (8.75%) when arising to an estate during administration. The executors on making the payment to the DT pay the net amount which is grossed up by the dividend ordinary rate and included gross by the DT. The DT’s liability is based on the dividend trust rate of 39.35% with an offsetting tax credit for the tax paid by the executors.
Although this is an old thread, I had the same question. I see HMRC’s workaround for the tax credit on estate dividend income passing to a trust is contained in the Trust and Estate Tax Return Guide page 13, which states:
“If the trustees of a will trust have received any dividend income in
the year from the personal representatives distributing the income
that arose during the administration period, enter the dividends in
box 9.10. This income will be chargeable on the trustees at the
dividend trust rate (39.35%). Claim any estate tax credit on the
dividend income at box 17.4”