Tax pools help trustees of discretionary trusts keep track of the amount of trust Income Tax paid. Trustees need to monitor this because payments to beneficiaries are taxed at the 'trust rate'.
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Tax pools apply to discretionary trusts where the trustees - who are responsible for paying all the trust's taxes - have 'discretion' over what to do with the income and sometimes the capital of the trust.
When trustees of a discretionary trust make a discretionary payment of income it's treated in the hands of the beneficiary as if Income Tax has already been paid at the trust rate (currently 45 per cent). This means the beneficiary could claim some or all of the tax back if they're a non-taxpayer or pay tax at 20 or 40 per cent.
Because of this, when trustees make a payment of income, they must ensure they have paid sufficient Income Tax (whether in the current year or in previous years) to cover the 45 per cent ‘tax credit’ (tax treated as deducted) that accompanies the income payment.
The tax pool keeps track of Income Tax the trustees pay. If the tax credit on subsequent income payments to beneficiaries can't be covered by the amount of tax recorded in the tax pool, the trustees must pay the difference through the Trust and Estate Tax Return.
The tax pool is a record that the trustees need to keep in order to show, at the end of a given tax year, the difference between:
When the trustees pay tax at the special trust rates, the tax pool increases by the amount of tax paid. This can vary between 20 and 45 per cent.
When the trustees pay income to beneficiaries the amount in the tax pool is reduced by the value of the 45 per cent tax credit that is carried with each payment.
The 'tax pool' itself is what's left at the end of the tax year of the tax paid by the trustees - excluding any non-refundable dividend tax credits - after the 45 per cent tax credits on any payments to beneficiaries have been deducted. Any balance is carried forward to the next tax year, and can be offset against payments then.
A shortfall can arise where the amount of tax credits on payments to beneficiaries exceeds the amount available in the tax pool.
This situation may happen for the following reasons:
You can use the HM Revenue & Customs (HMRC) tax pool calculator to:
If you file your SA900 Trust and Estate Tax Return by 31 October you can ask HMRC to work out your tax. When they do this they will also work out your tax pool surplus or shortfall for the following year based on:
They include the tax pool surplus or shortfall amount for the next tax year in your tax calculation.
If you choose to work out your own tax HMRC will check the tax pool only if they're reviewing your tax return for accuracy. It's therefore important to understand and get your tax pool figures right, so that you don’t accidentally overpay or underpay tax.
You can read more about the standard rate band in the guide below.