Settlor interested discretionary trusts - R185s & standard rate band

[Eworby]

I understand that for 2006/07 income of a settlor-interested discretionary trust is to be taxed at the rate applicable to trusts, presumably therefore the standard rate band is available to the trustees?

If so when preparing the tax deduction certificate for the settlor should this reflect the actual tax paid i.e. if there is only dividend income which is in excess of £1000 part of the income will have a tax credit of 10% and part 32.5% OR do the trustees not get the benefit of the standard rate band?

[Lee Young]

I do not agree with your statement.

If the trust is settlor-interested then all income will be taxed on the settlor and should be included in his or her tax return.

Why do you think otherwise?

[maths]

Whilst the income of a settlor interested trust is treated as the settlor's income for income tax purposes this does not according to HMRC remove the income tax liability on the part of the trustees.

Thus the trustees are under an obligation to pay tax at the rate applicable to trusts on the trust income.

The settlor then is allowed to take credit against his own liability for the tax paid by the trustees (in his own self assessment) which may lead to a tax repayment should (albeit unlikely) the settlor's liability be less than that of the trustees.

From memory however Form R185 (the new version) does not apply to this situation as it only works for payments to beneficiaries which is not the case for the settlor interested trust.

The right of reimbursement is however contained in s619 ITTOIA 2005.