If a UK IIP trust receives a UK source dividend, the trustees are subject to tax at the ordinary dividend rate (s.385 ITTOIA/ s.14 ITA)
The life tenant then receives a tax credit for tax paid by the trustees in a representative capacity.
My question (which I have tried and failed to answer) is whether a non-resident life tenant would be able to recover the tax paid by the trustees under the disregarded income rules (ITA s.811) or if the tax paid by the trustees would be “sums representing income tax deducted from the non-UK resident’s disregarded income for the tax year” as per 811(4)(a).
The position could be saved by mandating or a DTT exemption (in this case Art 10 Jersey/UK) but I am keen to understand the full position.
Tax is only deducted from income if it falls within part 15 ITA. Tax is not deducted from dividends of UK resident companies, it is charged by assessment including under s.14 ITA. Nor is it treated as tax deducted. I can’t think of many examples of that save for chargeable policy gains: s.530(1) ITTOIA and IPTM3810.
In the hands of trustees of an IIP trust governed by English law the beneficiary as the person entitled is taxable on the income from the trust’s sources. As you say s. 385 also charges the trustees as persons receiving.
The life tenant receives a credit for tax assessed on the trustees as recipients or deducted from income paid to them. Neither is tax deducted or treated as deducted by the trustees or indeed anyone else and so neither is a sum within s.811(4)(a) or (b). So A and B are zero and a repayment is due.
The whole theory of how a resident life tenant is charged to tax is an anachronism, severely exposed by the restriction on deducting interest from rent. If trust rental income and interest paid are equal the life tenant’s taxable income is zero but the trustees still have to pay basic rate tax on the rent with no deduction for the interest. Just like that! Tommy Cooper would have loved it.