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Matthew Hutton MA, CTA (fellow), AIIT, TEP comments on recent HMRC guidance on a compliance issue involving settlor-interested trusts. 

Context

HMRC's IHT & Trusts Newsletter (December 2009) highlighted an issue affecting settlors and trustees of settlor-interested trusts.

Guidance 

With settlor-interested trusts, the settlor is liable for all Income Tax due on income received by the trustees, even income that is not paid out to the settlor. However, the trustees are required to pay the tax, as the recipients of the income. The Income Tax rate applied depends on how the trust has been set up. If it operates as an accumulation or discretionary trust, the rate for that type of trust will apply. If it operates as an interest in possession trust, the rate for that type of trust applies.

Although the settlor is liable for all the tax due on income from such trusts (or the settlor-interested element of a partly settlor-interested trust), the trustees must complete a Trust & Estate Tax Return and pay tax on all of the income arising from the trust. Trustees should provide the settlor with a statement of the income they have received showing the rates of tax charged on it, bearing in mind that the income might be taxed in part at basic rate as well as the special trust rates.

There is currently no HMRC form for doing this and R185 (Trust Income) is not appropriate for this purpose. HMRC are developing a new form to address this need which should be available in time for the 2009/10 return.

The settlor must then enter on their personal tax return details of the Income Tax the trustees have paid on their behalf. They do this using form SA107 Trusts etc - the Trusts Supplementary Pages of the main SA100 Tax Return form. 

(HMRC IHT & Trusts Newsletter December 2009 p6)

Comment

While what HMRC say is correct in principle, it will not be the case where the trustees have mandated the income to a particular beneficiary, so that the trustees cannot be said to have received it. In that event trustees have no liability either to complete an SA form (assuming that they have not been sent one) or to pay any tax.

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