A trust may include funds which are not liable to tax at the
rate applicable to trusts. Only income which has been subjected to
tax at the rate applicable to trusts should be included in the
ESC/B18 calculation. You will need to apportion the distributions
not subject to the rate applicable to trusts to the total trust
income first (provided these distributions are funded rateably out
of trust income rather than being funded from a specified source)
in order to arrive at the correct figures for the ESC/B18
To apportion the annuity to the total trust income, the net annuity is divided by the total income of the trust, net of basic and savings rate tax and dividend tax credits but before tax is charged at the rate applicable to trusts and/or the dividend trust rate, and the result multiplied by the net income from each source arising to the trust.
For example, a trust receives net dividends (after the deduction of Trust Management Expenses) of £2,000 and net interest of £6,000. The total available for distribution is therefore £8,000. From this, the trustees make a net annuity payment of £1,000. The annuity is apportioned to the total trust income as follows:
Dividends: (1,000 ÷ 8,000) x 2,000 = 250
Interest: (1,000 ÷ 8,000) x 6,000 = 750
Therefore the income available for distribution, and subject to tax at the rate applicable to trusts and the dividend trust rate, is as follows:
Dividends: (2,000 – 250) 1,750
Interest: (6,000 – 750) 5,250
This remaining trust income can now be allocated to the beneficiary’s distribution according to the guidance at INTM367860 and following.