income tax settlor interested

[bill on line]

Dear Group

Am I right to say that all income of settlor interested discretionary trusts is taxed against the settlors marginal rate of tax?

Even if the settlor receives none of the trust income. For example all the trust income goes to another beneficiary X who maybe a non-tax payer. X cannot reclaim any tax paid by the trustees.

First the trustees pay tax on the trust income, eg at the 40% rate applicable to truts.

The trustees then pay all the trust income to beneficiary X.

Then if the settlors rate of income tax is less than the rate applicable to trusts eg 20% the settlor can reclaim the 20% difference in income tax.

I believe in the past the actual beneficiary who received the trust income was the one who could reclaim the income tax?

Thank you for looking
Bill

[Lee Young]

Even if the settlor receives none of the trust income the settlor is still taxed on all of it as though it were his own.

The person who recieves the income does not have to pay tax on it as tax is paid elsewhere. He or she also gets no tax credit and can not therefore reclaim overpaid tax (becuase he or she has not paid any).

The trutees should make no payment towards the tax - the settlor should pay it through his own return. It is not income subject to the rate applicable to trusts.

[Subhu]

section 686(2)ICTA 1988 has been amended and from 6 April 2006, the TRUSTEES of settlor-interested trusts are no longer taken out of the chage to special trust rates. Therefore the TRustees have to pay 32.5% or 40% tax as appropriate with full credit to the Settlor. For further details see HMRC tax bulletin 84, February 2007.

[bill on line]

Hi Subhu

Therefore the TRustees have to pay 32.5% or 40% tax as appropriate with full credit to the Settlor.

Does this mean the settlor can reclaim the difference in income tax paid by trustees and their own marginal rate of income tax if it is lower on all trust income.

Sorry for this question full ccredit means yes as i am learning.

Bill