I’m reviewing the trust accounts for a client who is trustee of a discretionary trust set up 14 years ago. Among the papers are annual R185 forms signed for each beneficiary by the lead Trustee.
I’m not sure if they have completed box 1 correctly. It asks
1 Net payments from non-settlor-interested UK resident
trusts (excluding box 2 income), after tax taken off
– enter the actual amount paid – enter the amount of tax
treated as deducted at the trust rate in the box below
(for details of how to calculate the tax credit, go to Trusts and taxes: Trusts and Income Tax - GOV.UK )
Does anyone have any knowledge of this form and what is the correct way to complete this section please?
Income passing through a discretionary trust loses its identity on the way through and when it comes out as a discretionary income distribution to a UK tax resident beneficiary, it carries a repayable tax credit at the rate applicable to trusts (RAT - currently 45%). Thus if the beneficiary received £55 net that distribution would carry a £45 repayable tax credit and would comprise a £100 gross discretionary income distribution for the purpose of the beneficiary’s own personal tax situation. The trustees can use their “tax pool” to frank this distribution, but if the pool is insufficient, they will have to make up the shortfall by means of a tax pool charge. This is the main reason why dividend income in a discretionary trust is a bad idea.
So, to summarise, for any non-settlor-interested discretionary trust, any net payment distributed to the beneficiary should be grossed up by 100/55. the net payment (55%) should be entered into the top box for question 1 and the tax credit (45%) should be entered into the box beneath that for question 1.
there is no tax free amount at the trust level. as @Max mentions “any net payment distributed to the beneficiary should be grossed up…….” it is at the individual beneficary level that they make use of the £500 individual allowance.