TSEM3024 - Trust income and gains: the charge on trustees: the tax pool - trustees calculate maximum discretionary payment
In this example, in the tax year 2019-2020 a trustee of a discretionary trust receives a dividend of £1,500. »Ê¹ÚÌåÓýapp trustee is chargeable at 38.1%.
| Description | Amount | Amount | Total |
|---|---|---|---|
| Dividend received | £1,500 | - | - |
| Tax at 7.5% on first £1,000 (standard rate band) | - | £75.00 | - |
| Tax at 38.1% on the remainder (£500 x 38.1%) | - | £190.50 | - |
| Total tax | - | £265.50 | - |
| Tax payable by trustee - goes into tax pool | - | £265.50 | - |
| Net income after tax | - | - | £1,234.50 |
If the trustee pays the net income of £1,234.50 to a beneficiary, the beneficiary receives a tax credit of 45% with this payment. »Ê¹ÚÌåÓýapp tax credit on the income payment to the beneficiary is calculated by grossing up the net payment at the appropriate tax rate. »Ê¹ÚÌåÓýapp grossed up payment is £2,244.55 with a tax credit of £1,010.05 (£1,234.50 x 100/55=£2,244.55).
However, if there is no tax pool brought forward from the previous year and there is no other income on which tax has been paid, the tax pool of £265.50 will not cover the tax credit of £1,010.05 on the payment made.
Under S496 the trustee would have to pay an additional income tax charge of £744.55(tax credit £1,010.05 less available tax pool of £265.50 = £744.55), but the trustees have no income available to pay this.
»Ê¹ÚÌåÓýapp maximum amount available for distribution to a beneficiary is 55% of the income after expenses, leaving the balance of 45% to cover the tax on the income and the additional tax charge under S496.
Where the tax credit is partially covered by a balance in the tax pool brought forward, the amount available for distribution is 55% of the income available after tax, plus the updated balance in the tax pool.
| Description | Amount | Total |
|---|---|---|
| Net income after tax | £1,234.50 | - |
| Add tax in tax pool | £265.50 | - |
| Total amount to cover payment to beneficiary and tax credit at 45% | £1,500.00 | - |
| Tax credit at 45% | - | £675.00 |
| Less tax paid in tax pool | - | £265.50 |
| Additional tax to be paid by trustee | - | £409.50 |
| Net payment to beneficiary | £825.00 | - |
»Ê¹ÚÌåÓýapp beneficiary is paid net income of £825 with a tax credit of £675, which is equivalent to gross income of £1,500 with a tax credit at 45%. »Ê¹ÚÌåÓýapp trustee pays a total of £675 tax to HMRC, £265.50 tax on the dividend received and the additional £409.50 under S496.