Loan Notes are held in an Employee Benefit Trust. Recently, these loan notes were encashed and gross interest of £4217 was paid out. The trustees paid rate applicable at trust rate of 45% of £1897. The employer then subjected the interest to further PAYE at 40% of £928, ERNI at 13.8% of £320 and EENI at 2% of £46. This is a total deduction of £3191, leaving net interest of £1026, an effective tax/NI rate of 76%. Is this the correct tax treatment? I cannot find anything in the legislation and I am at odds where to report the income in the tax return. Would it be on the trust pages, employment pages or somewhere else?
The rate of tax paid by the trust on the income is separate and distinct from any discretionary distributions made by them, except to the extent that any RAT tax paid has entered the tax pool and franks said discretionary distribution.
Where the discretionary distribution is also subjected to PAYE by the employer it was possible for the EBT trustees to reclaim the tax pool tax credit attaching to the distribution under extra-statutory concession A68 through a note on the trust tax return white space, provided they agreed to reduce the tax pool accordingly. Am not sure how this stands now that ESCs are gone but possibly someone else will be able to provide updated information.
Maxine Higgins
Citroen Wells
Thank for that information but I was wondering where to put the income and tax paid in the personal (SA100) Tax Return of the employee, who received the loan note interest from the EBT.
If the loan note interest has been subjected to PAYE as you suggest then it would already be included in their employment income. You do not need to put it on again; that would be duplication. They did not suffer the RAT tax; the trustees did and they can reclaim it. The individual only received the income once.
Apparently the employee is required to pay all tax liability associated with the loan notes. The employee has also paid the trustees’ tax liability as well. This has been confirmed by the Accounts department. So, how can an employee reclaim the tax that he has paid on behalf of the trustees and where do I put this tax reclaim on the tax return?
Which “accounts department” has given this advice?
It is not the employee/beneficiary obligation to account for trustee RAT tax, although the trustees may have issued a form R185 in respect of the income distribution. The employee only declares the income once, as employment income, and ignores the R185 distribution.
If they have paid any of the trustee RAT tax then they should reclaim it from the trustees not HMRC. The trustees should reclaim it from HMRC as previously described.