Tax regime for discretionary trusts. Further question.

[Shadowside]

I manage a discretionary trust set up by my parents.The income is paid to my children and they reclaim interest against their nil rate tax band.

Until the establishment of lower rate band last year everything seemed to balance.

Now as far as I can see the payment as declared on form R185 does not make allowance for the lower rate band but the tax the trust pays does so I am reclaiming more tax than the trust is paying.This would have been £100 05/06 and £200 06/07. Can this be true or am I missing something?

[Taxesclear.co.uk]

It seems you are paying out all the income as it arises.

You should not try and match the trust tax bill with the tax claimed by the children. The two calculations are completely separate.

The trust tax bill has to take into account whether there is a “tax pool” available . Do you an idea what this is as it will fluctuate every year.

If you donÂ’t know what a tax pool is then you need help

dennis@taxesclear.co.uk

[Shadowside]

Thanks Dennis.Yes I have usually paid out a little less than the trust income and maintained a small positive pool balance. I let IR do the tax calcs.

There are two trusts. One had positive balance of £200 in 04/05 which dropped by £100 last year so thats fine.

The other had less than £100 and that now shows 0. Assume the negative bit will get added on to tax bill this year.

Tax bill will be lower this year due to lower rate band increasing to £1000. Assume I back calculate from tax bill and set payment accordingly. Was much simpler the old way!

[Taxesclear.co.uk]

When the pool goes negative ie tax on dirtbutions reduces it below zero then you pay the difference to tax man.

As you say HMRC should do the calculation for you but you need to make sure the returns are correct in the first place

Hardly House of Elliot figures given the hassle just let the trustees appiont the capital to you ot your children and then place it on deposit for them with gross interest. Income will be below Deminimus levels for the settlemnts legislation to apply

Any potential CGT can be held over


Dennis@taxesclear.co.uk

[Shadowside]

Can I do simplified worked example to illustrate my dilemma.

Lets assume trust had gross interest income of £5000. Under the old system £1000 of tax would have been deducted at source and £1000 paid by trust. £3000 available to distribute. If £3000 entered on R185 it gives tax credit of £2000 which matches tax paid. Tax reclaimed equals tax paid.Good!

Under new system due to £1000 band tax payable by trust falls to £1800. That should give £3200 available to distribute on which £1800 tax can be reclaimed (By non tax payer) However if I put £3200 on R185 it will generate tax credit of £2133 which is more than tax paid. Thats where I start getting confused.

[Inquisitive]

I too find this confusing. When I queried this with the tax office some weeks ago I was told the updated version of form R185 would take care of the problem, but it didn't. In a subsequent conversation with them I was told I had to gross up using the 40% rate. So in future I'll have to calculate how much to distribute using the tax pool.

Inquisitive