TSEM3474 - Trust income and gains: vulnerable beneficiaries: claims to special tax treatment: computing the amount of relief: income tax - basic example
A trust has arisen in England as a result of an intestacy. There is one current beneficiary, a UK resident minor who is a vulnerable person. Because of the right to accumulate the trustees are liable at the special trust rates. A valid vulnerable beneficiary election is in force. The trustees receive the following income in 2004-05:
| Rent | £6,000 |
| Net bank interest | £4,000 (tax of £1,000 has been deducted at source) |
| UK dividends | £8,100 (these carry a non-payable tax credit of £900). |
Their income for tax purposes is:
| Rent | £6,000 |
| Interest | £5,000 (net interest of £4,000 + tax deducted £1,000) |
| Dividends | £9,000 (dividends received of £8,100 + tax credit £900). |
TQTI (the trustees’ tax liability before making a claim for special tax treatment) is:
| Non-savings | Savings | Dividend | ||
| Income | £6,000 | £5,000 | £9,000 | |
| Tax rate | 40% | 40% | 32.5% | |
| Tax chargeable | £2,400.00 | £2,000.00 | £2,925.00 | £7,325.00 |
The vulnerable person has no personal income or gains in the year and so the amount of TLV2 is nil.
TLV1 (the amount of additional tax that the vulnerable person would pay if the qualifying trusts income arose directly to him or her) is:
| Non-savings | Savings | Dividend | ||
| Income - actual | £0 | £0 | £0 | |
| Income treated as arising to the vulnerable person | £6,000 | £5,000 | £9,000 | |
| £6,000 | £5,000 | £9,000 | ||
| Less personal allowance | £4,745 | |||
| First £2,020 taxable at the starting rate (10%) | £1,255 | £765 | ||
| Tax chargeable | £125.50 | £76.50 | £202.00 | |
| Chargeable at dividend rate (10%) | £9,000 | |||
| Tax chargeable | £900.00 | £900.00 | ||
| Chargeable at lower rate (20%) | £4,235 | |||
| Tax chargeable | £847.00 | £847.00 | ||
| TLV1 | £1,949.00 | |||
| Less TLV2 | £0.00 | |||
| VQTI | £1,949.00 |
The reduction that the trustees can claim is TQTI - VQTI (£7,325 - £1,949) = £5,376. Their final liability is therefore:
| Tax due | £7,325.00 |
| Less reduction for special tax treatment | £5,376.00 |
| £1,949.00 |
