TSEM3017c - Trust income and gains: standard rate band -standard letter to be issued when the Last SA Return year is set - the tax pool

Where the ’Last SA Return’ year has been set in accordance with TSEM3017a, you have sent a letter in accordance with TSEM3016b, and the trustees or agent subsequently ask about the tax pool position, send them a letter using the text below.

‘[Name of trust]

You have asked about the tax pool

Where trustees exercise their discretion to make a payment to a beneficiary the payment is treated as an amount from which tax payable at the trust rate of 40% (50% from 2010-11) has been deducted. Trustees have to ensure that they have paid sufficient income tax to cover the amount of that deemed deduction, which is available as a tax credit to the beneficiary.

Income tax paid by trustees at the trust rate or dividend trust rate (less the 10% non-payable tax credit) goes into what is called the ‘tax pool’. This tax pool can be used to cover the amount of the deemed deduction but trustees pay additional tax to cover any shortfall. Any excess in the tax pool remaining after covering the deemed deduction is carried forward to the following year.

Tax paid on income within the standard rate band, that is the first £1,000 of income taxed at the basic rate (but not at the dividend ordinary rate) goes into the tax pool in the same way as income tax paid at the trust rate does, The following example is based on the standard rate band of £1000 for 2008-09 and uses the trust rates applicable for that year.

Example

Trustees receive net bank interest of £160 (tax of £40 has been deducted at source) and dividends of £180 (which carry a non-payable tax credit of £20).

If the trustees made a discretionary payment to a beneficiary of £60, that payment is treated as an amount from which tax payable at the trust rate of 40%(50% from 2010-11) has been deducted. The gross payment would therefore be £100 (£60 x 100/60) and the deemed deduction is £40 (100 x 40/100).

The trustees can include tax charged at the basic rate (20%) on the first £1,000 of their taxable income (but not tax charged at the dividend ordinary rate) in their tax pool. In this example the tax pool is therefore £40. This equals the amount of the deemed deduction and so the trustees have no further liability. As their income does not exceed £1,000 and all their liability is covered by tax deducted at source (on the interest) and tax credits (on the dividends) they do not need to submit a return. There is no excess on the tax pool remaining and so there is no tax pool to carry forward to the following year.

If the trustees’ income is exactly the same in the following year but they make a discretionary payment to a beneficiary of £72, the gross payment would be £120 (£72 x 100/60) and the deemed tax deduction is £48(£120 x 40/100). The tax pool again equals £40 so there is a shortfall of £8. The trustees will have to account for this. Although their income does not exceed £1,000 and their liability on that income is covered by tax deducted at source and tax credits, the tax pool is insufficient to cover the deemed deduction on the discretionary payment. The trustees will therefore have to submit a return’.

Finally, may I again remind you that from 2010-11 the trust rates change to 50% and 42.5% for dividend income.