settlor interested trusts

[Paula Henderson]

I think I may be misunderstanding something so I hope someone can explain it to me.
I believe that for income tax, if a settlor retains an interest in a trust, any income is assessable on him. ITTOIA s 624.
However, s 685 says that if income of a discretionary settlement is paid to a beneficiary then the beneficiary is deemed to receive the payment net, but cannot claim the tax credit.
Does that mean that the income is taxed twice?
Or am I reading this wrong?

[maths]

Does that mean that the income is taxed twice?

No.

Where s620 ITA 2007 applies the trust income is that of the settlor; the trustees are also subject to tax on trust income but any such tax is then creditable against the liability of the settlor.

Thus, only one set of tax is levied on trust income ie on the settlor.

ITTOIA 2005 s685A (not s685) removes such trusts from ITA 2007 ss 494/495 (see 685A(6)). Thus, on payments to beneficiaries the trustees are not required to account for any tax on the distributions and similarly the recipient beneficiaries cannot reclaim any attaching tax credit as there is none.

No double tax arises.

[Paula Henderson]

Thanks for this.
So does that mean that the beneficiaries would put this on their TR but obviously no tax credit is repayable.
I have just read in a TQT study text "Where the beneficiaries of a discretionary settlor interested trust distribute income to a beneficiary, the beneficiary is treated as recieving an amount of income equal to the net payment and the payment is deebed to be net of 50% tax. The payment is taxable as non savings income as the gihest prt of their income. The tax credit is not repayable.

[maths]

So does that mean that the beneficiaries would put this on their TR but obviously no tax credit is repayable.

Yes; Box 2 on the SA107 2011.

I have just read in a TQT study text "Where the beneficiaries of a discretionary settlor interested trust distribute income to a beneficiary, the beneficiary is treated as recieving an amount of income equal to the net payment and the payment is deebed to be net of 50% tax. The payment is taxable as non savings income as the highest part of their income. The tax credit is not repayable.

The net of 50% applies to payments received on or after 6.4.2010 (40% before this date).

The receipt is non-savings income (ITA 2007 s 18). However, as such income is treated as the highest part of an individual's total income (s 685A(5A)) and the attaching tax is not repayable or creditable against any other part of an individual's income tax liability (s685A(4)(b)) it is perhaps academic that it is technically taxable.