settlor intrested trusts income tax

[bill on line]

Dear Group

I am confused how Settlor interested income in possessions and discretionary trusts will be taxed regarding their income since the changes in the 2006 budget and if there are to be different rules for income tax for these two types of trust.

Will the trust beneficiaries including the settlor (if they are none, starting or basic rate tax payers) receiving income from an income in possessions or discretionary trust is able to reclaim any of the tax paid by the trustees.

I have read that income will be taxed at the rate applicable to trusts 40% (or 32.5% dividend). The beneficiary is treated as having paid income tax at the higher rate, but this tax is not repayable and cannot be off set against any other liability of the beneficiary. Making the trust very inefficient regards to income tax if the beneficiaries and settlor are none lower or basic rate tax payers.

Thank You

Iain

[maths]

I am not sure that the FA 2006 changes impact on income tax treatment.

The changes drastically affected the IHT treatment (and CGT)of trusts.

The trustees of discretionary trusts are liable to income tax at 32.5% re dividend income and 40% re other income.

Any distributions of income (other than dividend income) to a beneficiary are assumed to have borne tax at 40% and thus the beneficiary may reclaim if the beneficiary is liable at below the 40% rate.

Trustees of an interest in possession trust are liable at rates of 10%, 20% or 22% depending upon the type of income.

For the beneficiary who possesses the interest in possession a liability arises on the trust inome depending upon his personal tax position and again a net tax liability may arise or possibly a reclaim of tax paid by the trustees may be possible.

A settlor interested trust means the income of the trust (of whatever type)is the liability of the settlor who may reclaim the tax paid from the trustees (settlor interested means the income may be applied for the benefit of the settlor and/or spouse)