In a situation where the income from a settlor-interested trust (minor child of settlor is life tenant) is mandated to that life tenant - do the trustees still need to complete an income tax return? The answer would be no for a non-settlor interested trust; but if the settlor is already reporting the income on their own tax return, do the trustees need to do so then? If not, what does the life tenant report? do they get as a credit the tax which the settlor paid?
Technically yes they do, although they should perhaps put a note in the white space of the trust tax return explaining the circumstances and requesting that in view of this, would HMRC please not issue further notices to file a trust tax return, until and unless the circumstances change - in which scenario the trustees agree to advise HMRC accordingly. The trustees should also complete a form R185 for the beneficiary, including the mandated income in box 2. As explained in the notes on form R185 - the beneficiary should include this amount in box 2 on the SA107 page of their tax return, where it is treated as taxed income but such tax is not repayable.
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Not sure I completely agree with Maxine.
The minor life tenant is not subject to income tax on trust income as it is treated for all income tax purposes as that of the settlor (s624 ITTOIA 2005); there is thus no need for the beneficiary to disclose the income on their tax return.
I also understood that HMRC practice is that trustees are not required to file a Return if the income has been mandated to the life tenant ie trustees are not in receipt of such income. If the trustees had receipt of income a liability would arise; they would then issue R185(Settlor) to the settlor.
Malcolm Finney
The settlor is liable on the trust income (and would be entitled to a tax credit for any tax paid by the trustees if they had been liable to tax
Where we have settlor interested trusts, we report as per Malcolm. In this situation, we also make the trust dormant with HMRC for tax return purposes.
Lucy Orrow
Lambert Chapman LLP
You may be interested to know that, if you file online tax returns, HMRC’s system currently has no mechanism for seeing any text you include in the white space. Any information you do put in simply doesn’t get uploaded at their end. It’s far from ideal but that is the system they are currently working with. So much for digital transformation, eh.
Jane Whitfield
Barrett & Co Solicitors LLP
Malcom
I agree with you that the (minor) life-tenant is not subject to any further income tax on the income they are receiving, but there was a query about whether or not the life tenant could use the tax credit (hinting perhaps at whether they might claim repayment?) so if they have no other income then no, they do not need to do a tax return, however should they have other income then they perhaps should.
Also, whilst it may be HMRC practice not to require a tax return where income is mandated and there are no chargeable disposals, it is still necessary to request this as otherwise the HMRC computer automatically issues notices to file.
Hi Maxine, as per Malcolm’s note, the income is deemed to be the settlor’s and not the minor beneficiaries. It cannot therefore be reported as such and so no refund obtainable.
Yes Lucy, exactly - I agree with you both. It is HMRC with their Byzantine technicalities that potentially cause problems, especially now with the trust register bringing to their attention many trusts of which they were not previously aware, for the reasons outlined here.
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Maxine, you ask “whether or not the life tenant could use the tax credit?”.
As Lucy comments, the answer is “No”.
For an iip trust (not a DT) the settlor alone is exposed to higher and additional rates of income tax on the trust income with a credit for any tax paid (if any, at the basic rate) by the trustees. The settlor is then able to reclaim any such tax from the trustees.
Malcolm Finney
Thanks Malcolm.
I was referring to the implied question in the original posting - I am aware and have stated in my original response that the tax credit is not available to anyone but the settlor.
Maxine