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. The 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. The tax credit on the income payment to the beneficiary is calculated by grossing up the net payment at the appropriate tax rate. The 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.
The 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 | - |
The 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%. The trustee pays a total of £675 tax to HMRC, £265.50 tax on the dividend received and the additional £409.50 under S496.