Pension nominated to Trust

Post-75 any pension that is nominated to Trust suffers tax at the Trust rate (45%) and therefore 55% enters the Trust. However, as the Trust has effectively paid income tax at 45%, I would assume this amount enters the tax pool and therefore over time can be reclaimed by distributions to minor beneficiaries, for example.

Any thoughts?

Jonathan Lee
Jonathan Lee Consultancy

I understand this to be correct, although I haven’t seen any official confirmation.

Diana Smart
Gordons LLP

I too think this is probably right, but even if it is, if what the trustees receive is in the nature of trust capital (which intuitively I think it probably is) then there is likely to be a problem using up the pool, bearing in mind that the tax pool is only used up when income is paid to beneficiaries. Any income the trust receives will itself be taxable, so the tax pool will never be depleted - except perhaps unless it can be used to mitigate the (rather harsh) rule requiring trustees to deduct additional tax when they hand over dividend income to their beneficiaries (i.e. because the rate of tax on dividends is less than 45%). There is sometimes a similar issue when trustees surrender investment bonds (i.e. because it is a capital receipt subject to income tax) but in that case they will normally avoid the problem by assigning the policy to the beneficiary before it is surrendered.

Paul Davies
DWF LLP

HMRC’s position is set out here (half way down the page):
www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm073010

Matthew Harrison
STP Advisors

You could consider whether the nomination of any residual pension benefits to Trust is necessary. Clearly, this will depend on the circumstances - and the flexibility of the existing Trust Deed & Rules - but potentially the benefits could remain in the existing structure if it is itself constituted as a Discretionary Trust. Allocation of the residual fund could then be made to nominated beneficiaries who could draw benefits directly subject to Income Tax at their marginal rates. As such the 45% Trust rate would not apply.

Oli Sloam
Nigel Sloam & Co